Military Off the Shelf Procurements: A Norwegian Case Study

This paper is based on the authors’ report published at the Norwegian Defence Research Establishment (Presterud, Øhrn and Berg, 2016).

Abstract

Buying off the shelf procurements (OTS) has become an important part of the national acquisition strategy in several countries, and this paper seeks to bring empirical evidence on OTS as the preferred acquisition strategy by use of data from 2015 to 2022 investment portfolio of the Norwegian Armed Forces. We develop definitions for three categories of procurement – OTS, modified OTS and development projects – as well as a method to classify projects into these categories. Our first finding is that the characteristics of OTS projects correspond to modified OTS and development projects. Our second finding indicates that OTS projects perform better when it comes to the completion of projects according to the initial schedule, compared to development projects.

Keywords:

• Off the shelf procurement
• modified off the shelf procurement
• development in procurement
• defence
• acquisition strategy
• Norway

Notes

This paper is based on the authors’ report published at the Norwegian Defence Research Establishment (Presterud, Øhrn and Berg, 2016).

1. Defined as products that do not require any development, and that have an existing production line. This definition is formulated for use in this study. Examples of OTS procurements with payments in Norways investment portfolio 2015–2022 are the military transport aircraft Hercules C-130 J together with its updates, some of the updates on the F-16 aircraft and communication equipment for the Norwegian ISTAR (Intelligence, surveillance, target acquisition and reconnaissance) force in Afghanistan. There are several other terms used for off the shelf, such as ‘COTS’ (commercial off the shelf), or ‘MOTS’ (military off the shelf). We have intentionally used the term ‘OTS’ as we did not find it necessary to distinguish between these as products in all these OTS-categories hold the essential characteristics that they can be bought and put to use ‘as is’ from an existing production line. Furthermore, in this study of Norway we did not find the need to distinguish between imported and domestic OTS, as could be the case for a country with a larger domestic defence industry.

2. We use the term technological risk to distinguish uncertainty related to the technology from uncertainty related to cost and time. Some might regard Australian buy of Tiger helicopter and UK buy of Chinooks as examples of OTS procurement with large challenges. Following our definition of OTS, these procurements are likely not to be classified as OTS as they were bought in a domestic version and/or was not ready to be put to use ‘as is’ from an existing production line. Still, there will always be examples of ‘outliers’ of OTS procurements, where the benefits of lower risk and cost have been exchanged for large challenges due to different reasons. Furthermore it is far from given that any procurement will be more successful if OTS is chosen rather than developing new materiel.

3. OTS products having a shorter lifespan and operative relevance has also been referred to by the former Norwegian Chief of Defence Harald Sunde, in Aftenposten (2 November 2013).

4. Gansler and Lucyshyn (2008) use the term COTS (commercial off the shelf). We choose to use the term ‘OTS’, as we do not find it expedient to distinguish between imported and domestic products as both hold the essential characteristics that they can be bought and put to use ‘as is’ from an existing production line.

5. The definition of COTS (commercial off-the-shelf) in General Services Administration Department of Defense (2005) also allows for minor modifications.

6. Intelligence, surveillance, target acquisition and reconnaissance (ISTAR).

7. We considered dividing all projects into products or systems/sub-systems to be too time consuming an exercise that would have had little impact on the results. This is partly due to the challenge of defining what an actual system is, and partly because several projects are still in the planning phase and the actual composition of products is not yet decided. In order to classify these projects we used the current procurement strategy as reported by the experts from the investment division.

8. An example here is the F-35 aircraft.

9. Measured in NOK million (2015). The actual costs are defined as current costs as reported in the Norwegian Ministry of Defence investment database.

10. The sources were project documentation from the different stages of the procurement process, interviews with different people within the defence sector and investment databases used by project managers.

11. In the interviews, we presented our definition of OTS and asked the respondents to use this, in order to make the answers comparable with the rest of the study.

12. These development projects are the F-35, the main battle tank for the Army and the submarine project. The smallest of these projects is 20 times larger than the average project in the rest of the portfolio. One could argue that any typical year has large investment projects, but, in the case of a small country such as Norway, the largest projects are of such substantial size compared to the rest of the portfolio that they dominate all results.

13. Within the OTS category, 32% of the projects contain materiel bought from Norwegian industry. We did not collect data on whether it was defence industry.

14. Because costs are included in this section, we cannot link these to examples as it would result in classified information.

15. We use ‘deviation’ rather than ‘delay’ as some projects are completed ahead of schedule.

16. See also Figure A2 in the Appendix 1 for the distribution of investment cost between the categories.

17. See also Figure A1 in the Appendix 1.

18. The model does not specifically exclude large projects, but due to complexity and division into several projects we did not obtain data on F-35 delays, neither on the submarine project as this project will not start until 2019.

19. The five divisions are: 1 = Land division, 2 = Information infrastructure (INI) division, 3 = Sea division, 4 = Air division, 5 = Soldiers equipment, Logistics and Special operations forces.

20. Change in scope is defined by a reduction or increase in the project’s budget of 50% or more, compared to the initiation of the project. We considered the quality of the continuous data on cost overruns to be unsatisfactory; thus, we did not trust this variable to indicate the level of cost overruns in our model.

21. The completion of the project is defined as when the projects termination report is written according to the current schedule reported in the database of the Norwegian Ministry of Defence.

22. At a 5% level and 10% level for the two iterations, respectively.

23. Note that the coefficients magnitude is only −3.68e-10.

24. This especially applies to questions 3 and 5. Regarding question 3, if for example the United States is the first buyer of a version of the materiel, it does not exclude the possibility of the product being OTS due to the large domestic defence industry. The same logic applies for question 5; if the country has a large domestic defence industry the main version of the materiel does not necessarily have to be in use somewhere else in the world for it to be an OTS product.

25. See also Figures A1 and A2 in the Appendix 1.

26. The coefficient in the second iteration was significant at the 10% level.