MILITARY CONTRACTING: HOW OTHER NATIONS DO IT

We may prefer not to rely on commercial services to support military operations, but we would be foolish not to think creatively and systematically about how the private sector can help bridge capability and capacity gaps in the future.

From Xenophon’s 10,000 hoplites to the Flying Tigers, one of the most enduring solutions to the challenge of giving commanders the right kind of forces, in the right numbers, with the right preparation, and at the right time has been to rely on mercenaries, buying military forces when they are needed. However, soldiers-for-hire do not have a great reputation in the modern international order. U.S. experiences with contractors in Iraq and Afghanistan highlighted the persistent challenges of relying on non-governmental entities to perform military functions. Yet contractors are not going away. Erik Prince (the founder of Blackwater) recently argued for a shift to relying almost entirely on contractors to execute the U.S. strategy in Afghanistan. The Trump administration chose a different approach, but Prince’s proposal had real support among policymakers.

We may prefer not to rely on commercial services to support military operations, but we would be foolish not to think creatively and systematically about how the private sector can help bridge capability and capacity gaps in the future. The U.S. can learn a lot from how the modern militaries of some of America’s partners are expanding the boundaries of contracted military services. It also needs to be more systematic in its own evaluation of contracted services as a solution to the enduring challenge of force development.

Budget realities may push the Department of Defense (DoD) to reduce or divest core military capabilities that remain necessary to provide national security. How should we think about the question of whether to rely on contracted services? Pointing to Federal regulations is an insufficient answer, since “inherently governmental” is not given in nature and depends on the political, economic, and security context of the time. In other words, we get to decide what inherently governmental means (e.g., definitions in the FAIR Act, OMB Circular A-76, Federal Acquisition Regulation, and OFPP Policy Letter 11-01 vary). Instead, we need a better conceptual framework for considering the potential of contracted services.

Other nations’ militaries have filled various military capability gaps with contracted-service alternatives. What may be strange territory to the U.S. military is much more familiar ground to many other nations. Their experiences can help us rethink contracting risk, and challenge existing views concerning which U.S. military operational capabilities must remain military-only.

Canada’s military is significantly smaller and less well funded than U.S. forces, which requires it to find ways to maximize military capability under less than optimal funding conditions. The Canadian Department of National Defence (DND) has taken significant strides in exploring and utilizing contract services to cover shortfalls in Canadian military force structure and platform capability. For example, the author’s research found that Canada has contracted out its equivalent of Undergraduate Pilot Training, where the contractor provides and maintains the airplanes as well as runs the actual training administration. DND has completely contracted out ammunition production, unlike the U.S., which still retains organic military ammunition production capability and force structure. To fill another capability and force structure gap, DND contracted commercial explosive detection dog (EDD) teams for operations in support of its military forces in Afghanistan. Before they cancelled their F-35 order, DND even explored contracting aerial refueling services for their projected Joint Strike Fighter fleet.

The United Kingdom has similarly expanded the boundaries of contracted services. The U.K.’s Ministry of Defence (MoD) contracted aircrew and ground crew training services for 22 new A400M aircraft that are replacing its C-130 fleet. According to a 26 March 2013 Defense Industry Daily report, the British armed forces planned to relinquish helicopter search and rescue (SAR-H) capability in favor of a contracted-service alternative, replacing the British Armed Forces’ Sea Kings with a privately operated service of 22 SAR helicopters.

The Israeli Defense Force (IDF) contracted Aeronautics Defense Systems (ADS), an unmanned aerial vehicle (UAV), unmanned surface (land and maritime) vehicle, and intelligence, surveillance, and reconnaissance (ISR) systems company, “[m]aking military history as the first civilian company to carry out all-inclusive operational missions for the [IDF].” According to ADS’s corporate website, “Aeronautics has been outsourcing its visual intelligence services for field security to the IDF since 2002.”

These examples show the potential of cheaper contracted service alternatives to replace or supplement (during peak demand) expensive military platforms, operational capabilities, and force structure. However, two counterpoints must be addressed to fairly balance the argument.

One counterpoint to the apparent benefits of Canadian and British contract expansion is that they continue to rely on the United States for power-projection capabilities. These countries and other U.S. allies do not share the same global leadership role as the U.S., and do not have to support as many dependent partners. Unlike Canada, Great Britain and Israel, the U.S. does not have a superpower ally with similar, compatible capabilities upon which to rely for military support. Therefore, it may not have the luxury of replacing fiscally vulnerable U.S. military capabilities with cheaper contracted service alternatives.

A second counterpoint to learning from other nations’ militaries’ contracted-service choices is that they do not share the same constraints as the U.S. regarding what military operations contractors are authorized to perform. U.S. Federal Acquisition Regulation restrictions limit what functions contractors perform, largely barring them from “inherently governmental” activities.  Absent such limits, other nations may be willing to explore a wider range of options for replacing or supplementing military operational capabilities with cheaper contracted service alternatives.   Nevertheless, U.S. armed forces are expanding reliance on contracted services in many areas. The U.S. Navy and Marine Corps are currently contracting subsets of their aerial refueling and High-Speed Vehicle (HSV) transport operations and maintenance capabilities, so on a small scale, this idea has already taken root. Similar to the Israeli IDF example, in 2015 the U.S. Air Force began hiring contract pilots, sensor operators, and maintainers to address experience and manning shortfalls in their MQ-9 Reaper drone fleet.

When considering replacement or supplementation of military capability with contracted services, there are two perspectives from which to evaluate contracting opportunities: costs and benefits, and organizational risk. The cost/benefit approach focuses on the more tangible (i.e., monetary) effects of contracting out for a service. The organizational risk approach focuses on how contracted services influence the military’s operational effectiveness.

The U.S. military can learn valuable lessons from how allied and partner nations have managed this risk, compensating for losses in military capability with contracted service alternatives. At the same time, the DoD must be thoughtful about how it increases contracted services options.

Evaluating contracting opportunities in terms of costs and benefits, contracted services may reduce both economic and political expenditures for the military, offering three potential benefits. Those benefits include: reduced force structure, increased efficiency (measured as the organization’s proportion of combat units), and lower costs per service provided as long as the service market remains competitive.

First, contracting services may enable a reduction in organic military platforms, with an option to reduce attendant force structure and associated long-term military compensation and entitlement costs. Increases in military compensation costs have been a big part of affordability problems in the DoD. For example, from 1985-2015, personnel costs for the Army rose from just over a third to almost half of its budget. The situation got bad enough that military compensation reform, long a “third rail” in American politics, has in recent years become the object of legislative changes, as one way to control increasing compensation costs is to compensate fewer people.

Second, to the extent that contracted services generally focus on support and not combat elements, they increase the “tooth to tail” ratio of the military (the ratio of combat to non-combat elements). This creates the impression of greater efficiency, and potentially strengthens senior military leaders’ arguments for more money.

Third, although it is difficult to generalize about costs for the military to buy a service versus providing it itself (much depends on the market), competitive forces are tremendous drivers of production efficiencies and price decreases. All other things equal, the benefits of contracted services are greater when there is more competition in the market. Conversely, contracted services are going to be expensive when the military is the only consumer of a service (incurring risks that we will return to later). So, from a cost perspective, not all contracted services are created equal.  Contract development for some services may be prohibitively expensive compared to the benefits. Costs for contracted services increase when the context of service provision is difficult to anticipate (requiring extensive contingency conditions) either because the service is provided over an extended period, or because the environment is poorly understood or changing too rapidly (think Clausewitz’s “fog and friction”). Contract costs also increase when verification of service delivery or quality is difficult (requiring extensive monitoring and assessment), either because the service is intangible (how do you know when a consulting product is good or bad, for example), complex, or produced by large or widely distributed teams. In any of these situations – many of which are common in the military – organic provision of a service may be preferable.

Perhaps more important than cost/benefit analysis is the organizational risk incurred by contracting. What happens if contractor fails to deliver the good or service when needed? What happens if the contractor messes up? Delegating force structure and readiness to a contractor obviously favors contracted services insofar as it allows a military to produce more of the forces it wants. Contracting therefore can reduce the organizational risk of having too little capacity. However, when an organization becomes reliant on a single supplier for a key input, it may become subject to what economists call “the hold-up problem,” in which the supplier uses its leverage to negotiate for higher prices. Due to the idiosyncratic character of militaries and the limited competition for military goods and services, hold-up risk is likely to be more common in military contracting than in most private sector contexts.

A second contracting risk arises from the character of war itself. Wars have a nasty habit of defying our expectations, and military services are often provided in an environment that departs dramatically from the conditions anticipated in the contract. In Iraq, for example, the distinction between the front-line and the rest of the theater quickly faded, posing challenges to ensuring security for contracted services personnel. Given these conditions, contracted personnel may simply protest that “this wasn’t in the job description,” and refuse to show up for work. The field of organizational economics has much to say about this. No contract is truly complete, since ontracts cannot anticipate all possible conditions of contract delivery, nor can they prevent all opportunities for cheating. The simplest approach to managing hold-up risks or a loss of a service is to avoid contracting for a service that you cannot afford to lose, or that you cannot replace with an organic alternative.

The difficulty in ensuring the alignment of incentives between contractors and their customers, sometimes called the “principal-agent problem,” is a third organizational risk in contracting services. Contractors want to make a profit, and the profit motive may create risk-appetites that are misaligned to those of the militaries they serve. For example, security contractors want to protect their clients. Achieving “sustainable political outcomes” is not their purview, and they may be less careful than government forces in managing their impact on other parts of the population. This is a major risk in low-intensity conflicts like Afghanistan. Any contract must consider how (and by how much) contracted services incentives are misaligned with those of the government, and how that misalignment may affect strategic outcomes.

The last line of defense for mitigating adverse effects on strategic outcomes are the terms and languages in the contract itself. One can mitigate several contracting risks through smart contract development. For example, for contractor owned-and-operated aerial refueling services, the government could stipulate in the contract that the service provider will still provide contractor-owned aircraft and fuel, but allow for government operators in clearly defined, high-threat environments. This is but one of a variety of options that could ensure the safety of contracted services personnel from threats outside the scope of their contract (reducing contract hazard-incentive costs) and maintain the Government’s desired operational responsiveness of the contracted capability. The onus is on the government to carry the rigor of its cost/benefit and organizational risk analyses all the way through to the final step of negotiating contract language that will ensure it receives the capability it needs, when it needs it, without adversely affecting strategic outcomes.

As long as governments must balance limited defense resources against persistent uncertainty about when and where conflicts will arise, there will be a market for the private provision of military services. Non-traditional approaches to contracting services must be considered if DoD is going to meet increasing demands for forces at an acceptable cost. Perhaps relying more on contractors in Afghanistan is a bad idea, but we need to be more systematic in how we reach that conclusion. The U.S. military can learn valuable lessons from how allied and partner nations have managed this risk, compensating for losses in military capability with contracted service alternatives. At the same time, the DoD must be thoughtful about how it increases contracted services options, effectively managing the risks that are inherent in relying on private firms for military capabilities. An open mind is crucial, but so is caution.

Rick Wagner is a Colonel in the United States Air Force and a former faculty member of the U.S. Army War College. The views in this article are the author’s and do not necessarily reflect those of the U.S. Army, U.S. Air Force, or U.S. Government.

Photo Credit: Jeff J Mitchell/Getty Images

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