Where military spending really gets wasted.
Hi there. This is the second part of my series on why military kit costs so much. In last week’s instalment we looked at the technical reasons. To recap: we spoke about the performance requirements of military kit, (ammunition in particular), then we discussed the scale effects that keep certain items expensive because of low production volumes. We also looked at how requirements “ratchet” up over time due to ever-increasing constraints like force protection. After that we looked at why emerging technologies such as drones can bring savings, but we concluded by acknowledging that they can’t do everything.
This week we’ll look at the economic and bureaucratic reasons why military kit is so expensive. If you think that this will be a blueprint for cutting out that waste, then I regret to inform you that you’ll need to temper your expectations. We can (and maybe will) deplore bureaucracy but that doesn’t make it any less real.
I’ll start off by describing and explaining some of this inbuilt waste. Then I’ll discuss how modern technologies and ways of doing business might be used to streamline this waste. I’ll sum up (spoiler alert) by describing why it’s complicated and military spending involves important trade-offs.
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1. Military procurement has a lot of inbuilt waste…
Please forgive a slight non-military tangent. About two years ago there was a spicy news cycle in Ireland over a bicycle shelter which was built on the grounds of the houses of parliament. The shelter cost about €335,000. There was a predictable hue and cry over the expense, with politicians asking probing questions of the Office of Public Works, the contracting authority for this construction.
It might seem like a ridiculous amount to pay for a bit of glass, stone, cantilevered steel, and concrete. And it’s certainly not cheap. But anybody I knew who ever worked in procurement had a similar reaction: a shrug and words along the lines of: “ah yeah, it’s a lot, but that’s what these things cost.”
Things cost money.
—A wise man.
We all know why: Expensive labour. Burdensome red tape. Planning. Expensive materials. Energy costs. General inflation. But there’s a reason which often goes unexplored, and that’s the procurement system itself.
You see, there’s a misconception out there that rigid procurement processes exist to ensure we get the best value for money. This isn’t true. The procurement process exists so that we can retroactively justify spending the money, particularly if and when the contract goes to shit and the weapon/vehicle/ammunition purchased turns out to have issues.
No matter what goes wrong down the line, the senior officer or civil servant in charge of the purchase can say “we followed the process,” and therefore no-one can fault them. To fault them would be to fault the process, and that is quite simply unthinkable.
It’s a long and fraught process. Any mistake on the part of the contracting authority (i.e. the military or defence department in our example) can lead to legal challenges by unsuccessful suppliers. This raises the stakes, because a failure in the procurement process can set you back months or even years. So, the incentive is to get it right first time, which means being as explicit as possible in the “what we need part.” This has two effects. It limits the ability of suppliers to compete meaningfully on price1. And it incentivises you to make the contract as big as possible, so you don’t have to repeat the same work all over again.
Look at that: we’ve inadvertently created a system with dual upward pressures on price. This isn’t just theoretical. I can say with weary experience that cost considerations were close to the bottom of our priority list when I was involved in military procurement. If we could buy something directly from the supplier and avoid the procurement morass, then we’d do that on the basis, perhaps, that there was only one supplier. You can well imagine that this does nothing to keep prices down either.
The price advantage that large military contractors have is bolstered by their technical know-how. Sure, militaries have their own experts—entire teams or departments of them. But these experts rely on market participants as their touchpoints with reality. For most categories of “stuff,” the expert buyer can shop around with many different suppliers and even rely on academia as an independent reality check.
Military kit tends to have fewer suppliers and, although there’s lots of military-academic research out there, it’s harder to get access to it for security reasons. As a result, the buyer is left in a weaker position and can sometimes be a passive price taker, particularly for niche capabilities.
Is there any way to change this? Let’s look at that next.
2. …with few incentives to change
I wrote a few weeks back about the “misaligned incentives of the US military spending system,” i.e. pork-barrel politics. What this means is defence production sites being chosen not on the basis of what’s most efficient or most effective, but what brings the most jobs to certain constituencies.
This isn’t just a US problem: all countries with hefty military industries will face this political push for jobs. And of course, a bias toward “more jobs” runs directly against the traditional commercial desire to cut costs. The procurement clusterfuck that is the USA’s F-35 Lightning II fighter aircraft programme is a particularly striking example of this, with production based in 47 out of 50 US states and 8 partner countries:
As I mentioned before, one of the few advantages of being a defence minnow is that one’s military buyers can make a genuine choice between the best items that are on the market rather than having to patronise their domestic defence companies.
Then there are cost-plus contracts. Although they are explicitly discouraged in military procurement, they persist for some early-stage development where the supplier must take a lot of risk on an unproven technology. It’s easy to see how there’s little or no incentive to save money if the supplier’s payments are based on what they spend plus a percentage margin on top.
I wrote last week about the surprisingly modest production facilities of some manufacturers of complex guided missiles. If there’s such a demand for their products (there is) and there is obvious scope for greater efficiency by manufacturing at scale (there is), then why don’t the manufacturers seize this opportunity to grow?
To be fair, some of them are doing just that (e.g. Raytheon and Lockheed Martin in the USA, Rheinmetall in Germany). But it took them bloody long enough: the full-scale war in Ukraine has been going on for more than four years. Why did they wait?
The answer is financial risk: big defence bosses are worried about splurging on new sites, new production lines, new machines, and new staff for a demand which might collapse overnight should peace break out. Far better to sweat their existing human and steel assets, raise prices, and lie back in the certainty of an order book stretching years into the future (literally, in the case of some munitions). Leaving growth opportunities on the table must grate, but they probably sleep much sounder at night.
Some newer upstarts are trying to break the long procurement cycles and bring in a more modern type of manufacturing with rapid iteration and quick upgrade cycles. Let’s talk about some of these in the next section.
3. What opportunities do new technologies bring?
New technologies and business models can disrupt some of this inherent waste. The most famous/notorious of these is Anduril, a company which produces low-cost autonomous systems bound together by an AI-heavy operating system:
Be warned: the above video is full of jargon like: “Software-driven autonomous kill webs” and “the AI coordinates everything autonomously while humans supervise at the operational level making strategic decisions rather than tactical ones.”
It’s a compelling business model, and its unique selling point is that it rejects the high-performance characteristics which we normally demand from military kit, which we spoke about last week.
The cynic in me thinks that expensive guns and planes and guided missiles will still be valued for their performance. And maybe, just maybe, we’ll see pushback on the rush toward a killer robot model. But maybe not, given what we’re seeing in Ukraine.
Speaking of Ukraine, here we’ve seen both sides innovate with cheaper munitions. The Russians have taken to fitting their old “dumb” bombs with a set of wings which allows them to glide over 100 km to their target and hit a precise area.
The Ukrainians, in turn, have developed the FP-5 “Flamingo” cruise missile. This flies twice as far as a US Tomahawk missile for less than half the price. It’s thought to use repurposed aircraft engines and “dumb” bombs, like with the Russian glide bombs above. These have achieved strikes deep inside Russian territory and hit Russian military production sites.
So, are we seeing the end of the old paradigm of wasteful defence spending? I think caution is advised.
Sure, new technology is transformative, but only for now. If anyone thinks that big (or small) defence companies won’t find a way to make their profit margins on the new normal, then I’m afraid they’re being very naive. The fat margins of existing defence contractors are the opportunity for hungry upstarts, but they in turn will pad out their own prices for maximum profit when they get the opportunity.
Wow, I sound like a bit of a socialist there… please don’t tell the US President, he might drop something from his ever-diminishing stockpile of JDAMs on me.
Conclusion: The real trade-off
I joke about Donald Trump dropping a bomb on me, but the scary reality is that he actually could. There’s is no physical impediment to him raining down hellfire and damnation on me. That’s an incredible capability. It’s easy to lose sight of this amid talk of Iran’s strategic victory in the Straits of Hormuz.
But does this capability really need to cost $1 trillion? Or $1.5 trillion? I’d like to think there was a simple way to undo all the waste I discussed above, but I don’t see it. You can probably make some no-regret cuts, but if you go too far, you’ll inevitably destroy the sandbox of defence R&D which feeds the pipeline of military hardware.
The “war on the cheap” innovations we’ve discussed in the Russo-Ukrainian War above are examples of countries that are fighting existential (in Ukraine’s case) or semi-existential (in Russia’s case) wars. These countries are willing to take the hit on capability and performance to get more munitions downrange.
As Joe Stalin is supposed to have said: “Quantity has a quality all of its own.”
The real question is does a country like the USA want to keep the ability to project power halfway around the world while insulating its citizens from any ill effects? Because if you do, then that will cost you.
What do you think? Please let me know in the comments below. As always, remember to subscribe if you haven’t already. Thanks again for reading and see you next week.
Cover picture: The Pentagon Wars, HBO (1998), via Rotten Tomatoes.
- Because they can’t offer solutions optimised to their own cost model. To give a massively over-simplified example: let’s say you want to procure a new rifle and you want it to be precise. Good start. But how do you ensure you get this? One way to is use a performance-based specification, e.g. “the weapon must be capable of grouping shots within one minute of angle.” This lets the supplier propose the best solution to reach your specification. On the other hand, you could draw on your extensive knowledge of ballistics and weapons. If you know that a longer barrel aids precision, and a certain type of cartridge does the same, then you might specify something like: “the weapon must have a 21″ barrel and be chambered for 5.56 x 45 mm NATO ammunition.” This is a prescriptive specification, where the supplier has less leeway to propose the best solution to solving your problem (precision) and instead must propose a solution that meets your criteria. There are pros and cons to both types of specification, of course (you might end up with a laser weapon in the first instance, if you’re not careful), but in my experience the latter is too common, driven by well-meaning but burdensome NATO and other standards. ↩︎
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