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An assessment of the risks and benefits associated with the Ministry of Defence’s orientation to outsource the delivery of services.

This article was submitted by John J Hesketh.

Introduction

In the modern age, the provision of national security has been seen as a state responsibility and overwhelmingly as a state function, both in Britain and globally.  During the World Wars and subsequently the Cold War, the expenditure and coordination to ensure national survival could only be achieved by the nation itself – although this came at an extraordinary price.  When this period of assured defence requirements came to an end in the 1990s, governments worldwide seized the opportunity to radically downsize their militaries, typically by around a third (Heinecken 2014).  Conflict and instability continued, although generally on a small scale, usually unpredictably and geographically disparate from the homeland security that twentieth century military strategy was largely based around.  Today, the UK government needs to continue to make provision for national security whilst operating within stringent fiscal boundaries – along with the social and welfare needs of the population.  It is therefore unsurprising that the spotlight of efficiency was, and remains, pointed squarely at the MOD, an organisation that struggles to demonstrate cost-effectiveness in a field where there are few tangible benefits to the majority of taxpayers.  Outsourcing offers governments the opportunity to “buy” services from the market, instead of the traditional “make” route – and theoretically increase efficiency and performance simultaneously.  This report will consider the advantages and disadvantages of the MOD’s propensity to outsource and assess whether continued expansion of the practice should continue.

Outsourcing: a growing trend

The outsourcing of military support has gained momentum due to the emerging belief in the superiority of market solutions and the neoliberal commitment to reduce the size and functions of the public sector.” (Cusumano 2015, p.220)

Devolution of military support functions is not a new phenomenon – in the UK, the MOD’s competitive procurement policy (encompassing equipment and support functions) was introduced in 1983 by the Conservative government with the aim of improving efficiency and achieving VfM (Hartley 2011).  Public sector activities, regardless of department, are state monopolies – with no (threat of) competition there is little incentive to innovate, or to improve efficiency or quality, making eventual private sector involvement almost inevitable in an attempt to combat this. A political and national appetite to support outsourcing must exist (although the NHS is an example where it does not) and there are limits to private involvement, including front-line combat, biological and chemical defence and nuclear deterrence. As time goes on these limits are likely to be challenged (which will be discussed later) but already the extent of contracted support has reached unprecedented levels and is developing beyond traditional support services.

Figure 1 illustrates the traditional route for state security provision and the developing NPM framework for increasing involvement of the private sector – as embarked on by the UK.

Military outsourcing has developed through two stages, as described by Heinecken (2014): the single client phase, where the military is one of a portfolio of clients serviced by a company; and the main client phase, where the military is the principal or sole consumer of a firm’s services.  The latter is increasingly common and represents an interdependence between the state and a limited number of large companies – and a potential threat to the efficiencies being sought.  Long-term PPPs often fall in this category and five of the six categories initially identified by the UK government in 1996 are service-based (Hartley 2011).

Risks

A principal benefit of outsourcing is increased efficiency, but defining the required level of efficiency is the first challenge before any contract is signed.  Achieving the perfect balance between technical efficiency (the maximum possible output for the price) and allocative efficiency (the combination of outputs which best accords with consumers’ demands) (Nellis and Parker 2006) is virtually impossible, particularly in a changing world.  There is little doubt that pure technical efficiency has a place in some basic defence services but even here the least-cost option might not always be the best.  As complexity increases, difficult judgements on the level of defence expenditure against the promised output must be made.  These decisions which will have lasting effects and require inputs from commercial staff and, frequently, the military end-user (who may not remain in post long enough to see the contract commence!).  Achieving a cost/service equilibrium that satisfies all defence stakeholders and can remain relevant throughout the life of a contract is probably the greatest challenge of outsourcing, particularly in view of the media scrutiny that often surrounds public expenditure decisions.

Governments seeking to justify outsourcing cannot escape the classic principal-agent problem: service providers are ultimately driven by the requirement to maximise profit for their shareholders (Markusen 2003).  There is an incentive for contracted firms to deliver the terms of their contract at the minimum cost; although getting this wrong risks reputational damage which might jeopardise future business, the true cost might be in reduced defence capability.  For long-term PFI contracts, negotiations rely on parties acting in “good faith” (Parker and Hartley 2003) – something very difficult to enforce.  Defence must recognise the possibility that private markets can fail and that bids for contracts may be so low that they fail to cover costs, often referred to as the “winner’s curse” (MacDonald 2010), as happened to the East Coast Main Line railway franchise (BBC News 2009).  This situation prompted nationalisation of the line when a renegotiation request by the franchisee was refused by the government; in a defence context, there may be no option but to re-open talks with a provider, depending on the nature of the service.  Such levels of reliance on outsourcing is a related but separate risk, and may lead to price increases over time if the specialisation is one that cannot be adequately substituted (e.g. pilot training or specialist engineering).

Outsourcing has undoubtedly grown, in part, due to defence rationalisation and a draw-down in capabilities – where organic capabilities and market transaction costs are low, the “buy” decision is straightforward (and vice-versa), as described in Figure 2.

Figure 2: The make or buy decision: transaction costs versus organic capabilities. (Adapted from Parker and Hartley 2003, p.100)

When fiscal pressures demand a commercial solution in a novel, complex area, transaction costs increase exponentially with no guarantee of a successful outcome.  The UKMFTS partnership with Ascent is an example of how difficult it can be to write, monitor and enforce contracts of large scale and scope (Morse 2015).  Petersohn (2006a) points out that, although the US military saved US$700m via low-skill, repetitive task outsourcing, more complex tasks actually cost more when privatised.  Whereas this represents a financial risk, a less tangible issue is the dilution of contemporary military experience that outsourcing can bring about (such as permanent contractors in training delivery roles) together with the lure of civilian terms and conditions to serving personnel (Heinecken 2014). 

Benefits

The essence of NPM is that the government shifts from being the provider of its own services to the arbiter of services provided by others (Bevir, Rhodes and Weller 2003): outsourcing addresses the problem of the state monopoly, even if the provider is only compared with the previous public sector service.  The efficiency that outsourcing can provide is the obvious benefit in any argument – cost savings of 20-25% in non-deployed service provision is possible when exposed to competition (Uttley 2006).  Although such potential gains rely partly on neoclassical assumptions of perfect competition that are normally impossible to achieve inside the regulated realm of defence, the motivation of profit is likely to drive efficiency to some extent.  Transferring manpower to the private sector allows prioritisation of uniformed resources; cynically, the armed forces can exceed their manpower limits by outsourcing, but there are probably few soldiers who complain about mundane tasks being privatised.  Other manpower benefits include reductions in personnel, pension and housing costs.

 

Involving the private sector opens up defence to advances in technology and innovation that simply would not occur without the private sector.  Not only can this bring immediate benefits in financial capability, exposure of military personnel to contemporary business techniques will allow such practices to permeate the wider defence organisation.  In turn, the private sector can bring wider societal benefits through export activity, if security restrictions allow.  A good example of all these benefits is the privatisation of elements of the Defence Evaluation and Research Agency in 2002, with the new private company (QinetiQ) providing specialist test and evaluation services to defence whilst developing into an international defence firm (Bourn 2007).  The increasing use of technology in warfare has forced the outsourcing of some specialist high-technology skills that cannot be realistically maintained “in-house”, sometimes delivered in operational theatres as part of a maintenance agreement; the MOD has developed an overarching CONDO policy to harmonise such support requirements (Uttley 2004).

Outsourcing of service provision via PFIs has allowed levels of capital investment in defence that probably would not have happened otherwise: this is the reality of reduced defence spending and the alternative is the “equal misery” option, such as programme delays or training rationalisation (Hartley 2004).  Large PFIs, such as the AirTanker partnership to provide air-to-air refuelling, can plug capability shortfalls as older equipment becomes obsolete.  Where such large sums are being invested, employment of the private sector allows a proportion of the risk associated with major programmes to be divested to the contractor; this is true with any outsourcing scheme, although the ultimate risk will always lie with the government.

 US outsourcing

The expeditionary nature of post-Cold War conflict has led to most Western militaries adopting outsourcing to a greater or lesser extent, chiefly in logistics, equipment support, security and training.  There is a marked difference between the US and UK militaries, where the latter has refrained from outsourcing armed security and the provision of foreign military training (Cusumano 2015) – see Figure 3.

Figure 3: Military role conceptions and contractor support in the United States and the United Kingdom (Cusumano 2015, p.230)

The differences in civil/military culture in the USA, when compared to the UK and other European nations, goes part way towards explaining why deployed contractor support has been embraced as it has.  Ever since the Second Amendment to the US Constitution, the concept of the “citizen-soldier” has developed (Krebs 2009), reinforced recently by significant contributions in Iraq and Afghanistan by reserve forces and the National Guard.  Graduation of outsourcing to armed security (which is seen as logistical support in the US) and beyond is a natural progression and does not attract significant public resistance.  The US notion of the purpose of its armed forces is different to that of the UK, where the political impact of deployed forces can be far more important than the military effect achieved – it is important that these small, expeditionary forces are self-sufficient.  Although the US has suffered reputational damage from using PMSCs (such as the Blackwater killings in 2007 (Dunsmuir 2015)), the Bush administration’s committal in 2002 to the privatisation of all activities not directly linked to war fighting (Cusumano 2015) seems unlikely to be reversed.  Indeed, during the introduction of the Predator unmanned air vehice, the US Air Force even used contracted pilots in order to deploy the system earlier than would otherwise have been available (Petersohn 2010a), although the aircraft were in an unarmed role. 

Contractual Combat

 The financial pressure applied by successive CSRs and SDSRs looks set to persist and, as a result, ways to increase efficiency will continue to be sought.  Although the “red line” of private soldiers acting for the state remains some way from being crossed in the UK, it is being approached.  In the first Gulf War, deployed civilian contractors amounted to 1 in 60 uniformed personnel, but by 2006 in Iraq the ratio was 1.5 contractors to each military member (Uttley 2006).  Defence NPM demands that the government “thinks the unthinkable”; the reliance on civilian support in Afghanistan is probably little-known by the public, but shows how far outsourcing has come.

The benefits discussed so far would apply to outsourced combat forces, together with others including a huge reduction in the training burden which, as a bottom-fed organisation, costs the military so much.  The flexibility offered by PMSCs cannot be matched by the government, particularly in terms of manpower and materiel resources; the challenges of integration and cooperation with regular forces would be vast but not insurmountable.  Whether the image of the armed forces being diluted by contracted combat personnel would be publically acceptable is another matter, particularly in the UK where reputational military standards are so high.  Nevertheless, use of PMSCs to protect UK-flagged merchant ships in the Gulf of Aden is evidence of progress (although not contracted directly by the government).

The potential pitfalls are legion, however.  Transaction costs might be astronomical, particularly those associated with defining the allocation of risk – though the state would retain ultimate responsibility in any overt operation.  Command and control of contracted forces would require definition and could be straightforward enough until the situation changes (as it inevitably does in combat), leading to potential lack of flexibility and the possibility that contractors might simply leave if the situation worsens. Would contractors in direct support of combat be acting in the interests of the state, or the shareholders?  Holding companies to account when things go wrong would be very difficult and would only be good news for lawyers; the injury or death of a civilian at the hands of a PMSC might jeopardise a mission or even a whole campaign due to the resulting loss of legitimacy (Petersohn 2010b).

Conclusions

The global security situation and nature of military interventions since the end of the Cold War has seen a trend towards greater outsourcing in defence, driven in part by the wider adoption of NPM by Western governments.  Principal risks involved with outsourcing defence services include reduced flexibility, accountability and loyalty of private firms, together with increased transactional costs as service complexity rises and the diminution of the reputation, and potentially standards, of the armed forces.  These risks must be balanced against the advantages of innovation, increased efficiency, external expertise, investment and risk transfer that the private sector can deliver.  Outsourcing is not suitable for every defence function, although the experience of US outsourcing (where, for instance, armed security on foreign soil is seen as a logistical support function) demonstrates there are areas for development that have not yet been explored by the MOD.  Outsourcing by the UK in deployed operations developed throughout the Iraq and Afghanistan engagements and, however unpalatable it may be to soldiers and the public, future operations will not be possible without the service support that contractors provide.  Domestic outsourced services will continue to develop in the UK and are certainly here to stay; going beyond outsourced indirect combat support services may be some way off, and the potential benefits of doing so are apparently outweighed by the likely dangers.  However, it should be noted that the UK is not a signatory of the 1989 UN Convention against the recruitment, use, financing and training of mercenaries (Percy 2006) and the route to contracted combat remains, in theory at least, open.

References

BBC NEWS (2009). East Coast rail to be state-run. [online]. Last accessed 23 August 2015 at: http://news.bbc.co.uk/1/hi/business/8127851.stm

BEVIR, Mark, RHODES, Rod and WELLER, Patrick (2003). Traditions of governance: interpreting the changing role of the public sector. Public Administration, 81 (1), 1-17.

BOURN, John (2007). The privatisation of QinetiQ. Report by the Comptroller and Auditor General, London, National Audit Office.

CUSUMANO, Eugenio (2015). The scope of military privatisation: military role conceptions and contractor support in the United States and the United Kingdom. International Relations, 29 (2), 219-241.

DUNSMUIR, Lindsay (2015). Ex-Blackwater guards sentenced to prison in Baghdad killings. [online]. Last accessed 24 August 2015 at: http://uk.reuters.com/article/2015/04/13/us-usa-blackwater-sentence-idUKKBN0N425320150413

HARTLEY, Keith (2011). The economics of defence policy: a new perspective. Abingdon, Routledge.

HARTLEY, Keith (2004). The economics of military outsourcing. Defence Studies, 4 (2), 199-206.

HEINECKEN, Lindy (2014). Outsourcing public security: the unforeseen consequences for the military profession. Armed Forces & Society, 40 (4), 625-646.

KNIGHT, Sam (2015). Can Winston Churchill’s grandson save Serco? And is it worth saving? [online]. Last accessed 23 August 2015 at: http://www.theguardian.com/business/2015/jul/02/serco-rupert-soames-outsourcing-privatisation

KREBS, Ronald (2009). The citizen-soldier tradition in the United States: has its demise been greatly exaggerated? Armed Forces & Society, 36 (1), 153-173.

MACDONALD, Peter (2010). Economics of military outsourcing. PhD Thesis, York, The University of York.

MARKUSEN, Ann (2003). The case against privatizing national security. Governance, 16 (4), 471-501.

MORSE, Amyas (2015). Military flying training. Report by the Comptroller and Auditor General, London, National Audit Office.

NELLIS, Joe and PARKER, David (2006). Principles of business economics. Harlow, Pearson Education.

ORTIZ, Carlos (2010). The new public management of security: the contracting and managerial state and the private military industry. Public Money & Management, 30 (1), 35-41.

PARKER, David and HARTLEY, Keith (2003). Transaction costs, relational contracting and public private partnerships: a case study of UK defence. Journal of Purchasing & Supply Management, 2003 (9), 97-108.

PERCY, Sarah (2006). Regulating the private security industry. Adelphi Paper No. 316, London, International Institute for Strategic Studies.

PETERSOHN, Ulrich (2010b). Privatising security: the limits of military outsourcing. CSS Analysis Report, Zurich, Centre for Security Studies.

PETERSOHN, Ulrich (2010a). Sovereignty and privatizing the military: an institutional explanation. Contemporary Security Policy, 31 (3), 531-552.

UTTLEY, Matthew (2006). Private contractors on deployed military operations: inter-agency opportunities and challenges. In: UTTLEY, Matthew, (ed.). Heritage Lectures, The Heritage Foundation, 1-5.

UTTLEY, Matthew (2004). Private contractors on deployed operations: the United Kingdom experience. Defence Studies, 4 (2), 145-165.

[1] The first MOD outsourcing contract was won in 1984 at RAF Quedgeley by RCA Services Ltd – later to become Serco (Knight 2015).

[2] Training; property and accommodation; IT; equipment; support services; utilities.

[3] 201 of 254 depot-level maintenance tasks were most expensive when outsourced.

[4] Combined coalition deployed forces.

[5] The Royal Fleet Auxiliary, a government-owned civilian-manned organisation, overcomes this risk by using sponsored reserves that can be activated in times of conflict.

 

10 COMMENTS

  1. There are obvious elements of defence that should not be outsourced, however, where the risks are diminished and can be monitored by a third party. it makes good business sense. I still believe the MOD could raise some of its own funds, any financial benefit is better than nothing. I have identified areas of self-funding in an earlier post, only for nonqualified voices to say they would contribute a meaningless income?

    Any outsourcing of military support opens the possibility of a ‘Trojan Horse’ risk. That said, if real saving can be obtained by the practice, it should be vigorously pursued.

  2. “There is an incentive for contracted firms to deliver the terms of their contract at the minimum cost; although getting this wrong risks reputational damage which might jeopardise future business, the true cost might be in reduced defence capability. For long-term PFI contracts, negotiations rely on parties acting in “good faith” …something very difficult to enforce. ”

    The above snapshot taken from above, says it all. As for getting it wrong, I feel the MOD (and Government) are getting it wrong more times than they have got it right, off the back of my head I can list:
    1) Pay As You Dine system, which saw the Army Catering Corps replaced by civy companies. As the Army marches on its stomach, replacing quality food with fast food (And its not even as good as the stuff you can buy downtown) isn’t the way to go.
    2) Army recruiting .. well that worked out well didn’t it.
    3) Replacing REME first, second line vehicle repair with civy companies.

    This isn’t me, trying to claim it was better in the good old days, I fully except that change is inevitable. But the pound foolish, penny shy attitude the MOD has, only serves to erode the military capability of the armed forces, not enhance it. Going on my three examples above:
    1) Soldiers are fed a diet of crap food (despite MATTs 6 on healthy living) but worse, we have eroded our Army chefs down to a virtually part time regiment . I’m not saying they are bad, but not having on demand full time chefs ,who can be deployed at the drop of a hat. doesn’t make for good contingency planning.
    2) Army recruiting: Well getting rid of all the small army recruiting branches and replacing them with Captia hasn’t gone as well as it should have. I actually attended a huge recruiting meeting at RMAS a few years back (Officer recruiting) and nobody in the audience (over 500 people) was happy. They (And we) were all told we had to make it work, problem is nobody informed Capita to do likewise and they simply are not fit for business. Replacing initial contacts with an online application isn’t working. (For example, one of my candidates, was refused as she stated she suffered from acne when she was a teen. The computer said no, yet the girl is a stunning young lady with no issues whatsoever in the skin department. She contested it, and was informed by Captia to keep a diary for 2 years and if she was problem free after that time she was to resubmit her application) I’ve plenty more anecdotes such as that.
    3) Cutting back vehicle servicing and repairs by replacing REME assets with quickfit may save money initially , but you are not only reducing your REME assets , but the skill base required to act quickly in the field, which is where you need to be at the top of the game. Not just vehicles either, the set up to service Tornados in St Athan didn’t go to plan, first of all the company outsourced to repair Jets messed up and then after spending £113 million building a superhanger the government sold the site.

    Personally I don’t feel anybody has any issues with trying to get better value for the taxpayers money, but all I see is a lot of money been pissed against the wall.

    • Compeltly agree with recruiting. Notwithstanding that it should never have been privatised in the first place it’s been a complete and utter disaster. How the contract hasn’t been stripped from them yet I’ll never know.

      Where does it currently stand? Last I heard when they looked at how many people they had recruited, it had actually fallen for the regulars and the reserves had only grown by a measly sixty. And that was apparently because they kept people on the books that hadn’t attended a training session in months.

    • You are missing a step, the problem isn’t with the private companies fulfilling the outsourced contract, it is the designer of the contract (ie the government). This is why the whole of DES needs to be privatised, then you have fully competent people designing the contracts who are supported by excellent well informed people and not conducted by numpties that the government employs. A computer only works if you put good data in in the first place

  3. I have led a number of large non governmental outsource deals during my career and a few things have always struck me.

    1. outsourcing is the recognition that management are powerless to change the organisation from within, or the lazy persons way to get some headlines.
    2. Those senior people who action outsourcing rarely accept that they are outsourcing the activity and not the risk (which remains with the customer, not the outsourced).
    3. To Deliver the required savings things need to be done differently, often this means cutting back on service and service levels, with resultant punitive costing for additions.
    4. Business case degrades rapidly from the moment negotiations start in earnest – often by as much as 60-80%.
    5. By this time the customer is committed to an “irrational decision” and will sign to save face.

    In short outsourcing is often used to reset commercial organisations bottom lines when operational costs have spun out of control, this then leads to multiple outsource contracts that then need consolidating (another failure of management) at which point the organisation is often a shadow of its former self.

    Just look at Amazon, it has strong management, clear direction and laser like focus on the customer. It is currently unhappy with delivery services in the UK and is looking to bring them in house as it believes it will do that better than the recognised specialists.

    In all the outsource deals I have done, none have released the values stated by the Execs or the companies involved and have been absolute nightmares to implement.

    Why anyone would consider outsourcing the military or police is beyond me.. but there you go.

    • Because it costs less in the short term which looks good on HMG balance sheets yet costs far more long term?

      And if you remove the military element eventually those same private companies using ex military for their experience in much the same role they had when in run out of that experience as the military no longer cover it.

      I’m totally against it.

  4. Outsourcing has proven a disaster in far too many cases. Take the private security contracted in during the Olympics when held in London. An expensive disaster. Although I have been accused by many on here of variously working for Moscow, the IRA and worse, even I understand public services cannot be run as a business. They don’t make profits nor should they!

  5. The two major programmes I’ve been involved in have both worked well and delivered what the customer wants, and the rest! I cannot reveal what they were, but they were both RAF and major. Both contractors bent over backwards to deliver what the customer wanted, often beyond the contractual requirement and not always in the best interest of their shareholder(s). Granted, the start-up phases were difficult and often very prickly. But the good will showed by management on both sides to make it work was commendable. Yes, it could be argued that in some cases it was not best value for tax payers, although I would argue that in most cases it actually was. However, when in many instances trying to make a straight forward comparison with what it would have cost the State to deliver an equivalent service, we found that the RAF simply didn’t know the cost of a particular service or didn’t have the cost accounting methodology to recognise it. Certainly the equivalent ‘spanner-in-hand’ efficiency of the contractor personnel was far higher than the equivalent RAF personnel – and rightly so, because the RAF person was required to perform a great number of other ‘military’ duties for the day they may have to place their pink bodies in harm’s way, which the civilian contractor did not. So my conclusion is that outsourcing is a good thing – very effective, efficient and ultimately cheaper for Defence – but it must be done in the right places and at the appropriate level. It’s great for certain things, not for others. It is not the answer to everything but it’s here to stay and it is a very good, obvious answer in many carefully selected instances. I speak with thirty years experience of delivering complex programmes to military customers. I am now retired. I am prod of what I and the teams who worked for me achieved working hand in hand with our partners in uniform. Admittedly, not all of them welcomed our presence on base, but I think over time most of them did.

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