Vanguard Magazine

I In ServIce Support by Ugurhan G. Berkok 32 AprIL/MAY 2017 www.vanguardcanada.com Defence platform sustainment: From traditional options to UK's PPPs and to JSF International Scheme A rule of thumb for the sustain- ment cost of military platforms is that the sustainment-acquisi- tion costs ratio is in the order of two to three – more like three for land systems and then two for air and naval systems. Beyond such budgetary implica- tions, since sustainment is as crucial an input as the equipment itself into opera- tional capabilities, many questions arise for the acquisition of sustainment services. Is sustainment to be provided in-house by the military, by the original equipment manufacturer (OEM), or by third parties that could be domestic or foreign firms? If foreign firms provide sustainment services, should offsets be imposed? Stepping outside the traditional con- cepts, sustainment can be international, such as in the cases of C-17 Globemaster, OCCAR and JSF, or whole capability can be privatized, as in some UK capabilities, thus shifting all sustainment decisions, bundled with the capability's equipment, to the private sector. Traditional sustainment The traditional sustainment paradigm con- sisted of comparing in-house capability to outsourcing, where the choice is between the original equipment manufacturer (OEM) and another private contractor. Outsourcing is typically part of offsets ar- rangements for countries other than OEM's country of origin. It depends typically on four factors. First, a necessary condition for outsourc- ing is the potential for cost savings. This presumes that specialized firms, domestic or OEM, can provide sustainment at a low- er cost than in-house provision by exploit- ing scale economies, especially in the case of OEMs, which also enjoy an advantage due to their expertise on the equipment they developed and manufactured. The procuring country may negotiate further savings at this stage due to its stronger bar- gaining power at the time of purchase by bundling the equipment with a long-term sustainment contract. Second, an outsourcing decision is not independent of the form of outsourcing, as most countries perceive domestic con- tractors as more advantageous in terms of developing industrial and technological ca- pabilities beyond the period of the sustain- ment contract. Third, on the downside, operational in- terruption as a risk factor is incorporated into outsourcing decisions, as only an in- house capability is fully integrated into op- erational capabilities. Finally, as another risk factor, the erosion of an in-house sustainment capability upon outsourcing may also undermine the smart buyer capabilities for subsequent acquisitions. contractual issues in traditional sustainment Sustainment outsourcing requires detailed long-term contracts; since investment in specific assets is inevitable, lengthier con- tracts will thicken the field of potential bidders. Since markets for defence equip- ment manufacturing and sustainment are typically thin, performance incentives must be reinforced by such proactive con- tractual measures as on and off ramps. Whereas on-ramp provisions may thick- en the field and bolster the competitive field, off-ramp provisions may set the stage for contract termination upon poor per- formance. This off-ramp incentive bites, especially towards the end of the contract- ing period where the contract weakens to provide performance incentives due to a shorter horizon with a smaller potential for profits, and possibly to a lack of lucra- tive subsequent contracts. From the firm's perspective, if off-ramps are used repeat- edly and the contract is frequently re-ten- dered, the risk to purchasing specialized equipment rises and generates a reverse hold-up problem. Moreover, if a firm is likely to lose at re-tendering, it may cancel Take advantage of the Early Bird rate, visit www.C4ISRandbeyond.com For more Information on Sponsorship, please contact: Marcello Sukhdeo, National Account Manager 905-727-4091 Ext. 224 or marcellos@netgov.ca For more information or to register, contact: Laskey S. Hart, Director, Social Content & Events 647-794-1205 or laskey@promotivemedia.ca

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