THE BLOG
08/22/2012 11:07 am ET Updated Oct 22, 2012

How May We Service You?

One question that is often asked, but rarely answered with any accuracy is just how much money there is in the private military contracting sector. To be clear, what we are talking about here, to distinguish the sector from the more traditional military-industrial complex which builds weapons, is what can be called the military services sector.

Fortunately, the new edition of the annual Stockholm International Peace Research Institute (SIPRI) yearbook brings some academic rigor and hard numbers to this question.

First, their definition of the sector: "Military services are military-specific services -- such as research and analysis, technical services, operational support, and armed force -- that were once undertaken by military establishments but have been outsourced to private companies."

And now for the rhetorical question, a la "Is the Pope Catholic? Is this a growth sector?

The private military services industry has grown substantially over the past two decades. The SIPRI Top 100 arms-producing and military services companies for 2010 includes 20 companies categorized as primarily military services providers; their combined military-related sales in 2010 totalled $55 billion. This is a 147 per cent real-terms increase in sales since 2002, when the SIPRI Top 100 included 20 military services companies with combined military sales of $22 billion (in constant 2010 dollars).

Now one might say well, of course, it has been a growth sector given how extraordinarily dependent the United States was and is on PMCs for its wars in Iraq and Afghanistan over the past decade, but what about the future?

Not to worry, the future is looking very sunny for the industry. Even allowing for the prospect of actually significant reductions in U.S. military spending, admittedly a vanishingly small likelihood, the forecast is for continued profits. According to SIPRI:

The shift is part of strategies to maintain sales in anticipation of cuts in armaments programmes. On the other hand, companies are moving into military services (a) to take advantage of general government cost-savings efforts, (b) to protect themselves from the reduction in projects that had become expected to rotate among the prime contractors as a means of maintaining the financial health of the arms industry (known as Kurth's 'follow-on' imperative), and (c) to take advantage of governments' general willingness to decrease the number of new programmes and extend the in-service time of existing platforms. For instance, even before the global financial and economic crisis set in, the US military was planning to move to a commercial maintenance, repair and overhaul (MRO) model for air systems. This 'through-life' approach aims to reduce the costs of aircraft acquisition as well as support for equipment already in service.

Even without the wars in Iraq and Afghanistan to sustain profits CEOs can take heart; other market segments beckon:

There has been a longer presence of military services companies in UN peace operations, which has implications for peace management in post-conflict settings. Every UN-led multilateral peace operation since 1990 has included private security companies. For example, private companies actively support many peace and stability operations in Africa, including support for logistics, training and development. Demand for these types of service in UN peace operations has grown because of the higher number of operations over the past 15 years and their growing complexity.

Doubtlessly you're wondering, as good American patriots, given the globalized nature of commerce nowadays, how American companies are doing. Are they competitive? You can relax, or in the spirit of the recent London Olympics, chant "USA, USA, USA!"

SIPRI found that of the 20 military services companies in the Top 100 for 2010, 16 are based in the USA, with total military services sales of $47 billion. A further three are based in the United Kingdom, with total sales of $6.6 billion, and one is based in Kuwait, with sales of $1.3 billion.

For example, KBR's military services sales increased by 433 percent between 2002 and 2009, and by 2009 it had $4.8 billion in sales from the Logistics Civilian Augmentation Program (LOGCAP) of the US Department of Defense.

Please note that SIPRI's data actually somewhat understates the dimensions of the industry as "the data covers only companies categorized as predominantly military services providers. In addition to these 20 companies, a large number of companies in the Top 100 that are not categorized as military services companies nevertheless generate significant sales from military services."

Also, given that most commentators usually divide the industry into two categories, i.e. logistics and shooters it is worth noting that it actually goes well beyond that, to include research and analysis and technical services (e.g. informational technology services, system support).

Interestingly, the increased emphasis on aerial drones and other robotic systems in recent years has proven to be both confirmation of the growth in the systems support services subsector and a vulnerability to the traditional industry cost-effectiveness argument:

The increasing use of UASs, their growing technological sophistication and a shortage of trained military personnel have led to greater use of civilian personnel in their operation. Notably--and contrary to the argument typically used to justify the outsourcing of military services--the more civilians that are involved in operating a UAS, the more expensive the service becomes.

And while this not exactly breaking news SIPRI does note that the sector has become more adept at public relations; rhetoric over reality, one might say.

During this period some companies have rebranded themselves from companies providing private military capabilities and protective services to include human rights training, democratic transition services and other non-arms related services. For example, in 2011 Academi--which was previously known as Xe Services and, before that, Blackwater--announced that it would shift its focus from security provision to training. Even with these elements of rebranding and diversification, many private military companies continue to provide traditional services for conflict and war situations. Even the largest weapon systems integrators promote their service divisions for peace and stability operations. For example, on the website of the International Stability Operations Association, BAE Systems lists its services as aviation logistics and maintenance; communications and tracking; information technology; intelligence services and analysis; logistics, freight and supply; security; and training.