Global Trend

Selling to the Military Is Big Business

A $200 billion market is opening to American companies of all sizes. The U.S. Department of Defense is making radical changes that could provide unprecedented opportunities for your business and for your investments. The four branches of the military ? the Army, Navy, Air Force, and Marines ? are looking beyond their traditional weapons contractors and seeking suppliers in such areas as information technology, housing, and health care.

Why is this happening now? The trend is part of the bigger movement toward government outsourcing. However, many of the contracts are not open to off shoring because of security issues, creating a great opportunity for American outsourcing firms.

More importantly, the market is opening because of several changes in the military’s objectives. The armed services are focusing on becoming faster and more flexible to respond quickly to terrorism around the globe. They are also responding to the need to do a better job of equipping their personnel, both on the battlefield and in the barracks.

Without a draft, the military must depend on a limited supply of scarce human capital, while deploying it optimally around the globe. To keep enlistments and reenlistments from falling, all of the military branches are striving to provide a more comfortable lifestyle for the families of their personnel.

According to two experts, all of this adds up to a tremendous opportunity ? if you know how to respond. Mahlon Apgar IV is a director of the Boston Consulting Group. He was assistant secretary of the Army for installations and environment from 1998 to 2001, where he developed one of the Defense Department’s largest privatization programs. John M. Keane is a retired general and former commander of the 101st Airborne Division. He served as the Army’s vice chief of staff, the equivalent of its chief operating officer, from 1999 to 2003.

Their article, “New Business with the New Military,” appeared in the September 2004 Harvard Business Review. Based on their own extensive experience, interviews with 60 military and civilian leaders, and unclassified Department of Defense data, they have concluded that business opportunities for military customers total $200 billion ? excluding sales of weapons or any other goods sold to wage wars.

The military services spend about $100 billion on non-combat needs. Meanwhile, the 7 million active and retired military personnel, their families, and civilians who work for the Department of Defense spend another $100 billion of their annual income on discretionary personal products and services.

In searching for business opportunities, Apgar and Keane studied the functions for which the military already buys goods and services. They asked two questions:

First, could companies take on a bigger role in managing this function through outsourcing or privatization?

Second, can the function be scaled and sustained, so that a long-term business program could be created to manage it?

They found nine categories that met these two criteria, as follows:

- Professional and business services, at $17 billion in current spending.
- IT and telecommunications, at $16 billion.
- Housing, at $12 billion.
- Health care, at $11 billion.
- Property maintenance, at $7 billion.
- Utilities, at $5 billion.
- Transportation, at $5 billion.
- Equipment maintenance, at $4 billion.
- Food services, at $3 billion.

Interestingly, the Department of Defense actually spends more money than is allocated in its budget for several functions, so the actual opportunities for businesses may be even more attractive than the figures we’ve just listed.

The military is already a profitable customer for many businesses. Humana gets $2.4 billion for health-care services; FedEx receives $1 billion for delivery services; Booz-Allen Hamilton earns $800 million for consulting; and Dell collects $640 million for computers.

What new opportunities will emerge from this trend? Here are three forecasts for your consideration:

First, expect to see the Department of Defense outsource and privatize many of its in-house activities. The fact is that it is already using 600,000 civilians to fill positions, including clerks, technicians, and managers. If, as Apgar and Keane forecast, 270,000 of these positions are outsourced to businesses or privatized, private companies could generate roughly $20 billion a year in revenues.

Second, many of the military’s functions will be outsourced. One example is vehicle fleet management. The U.S. Army operates the largest vehicle fleet in the country, and the second largest construction vehicle fleet. The Department of Defense maintains more than 350,000 Humvees, trucks, and cars. In 2003, it spent $4 billion on vehicles, parts, and construction equipment, and $1 billion on fuel and maintenance. However, the vehicles are aging, and the war in Iraq is reducing its inventory and placing a heavy burden on the military’s mechanics. Apgar and Keane suggest that if the “fleet management industry” took over this function, it could use IT and scale advantages to lower costs and improve performance. The British Army has already outsourced the management of its construction and heavy-truck fleets, and we expect the U.S. military to do the same.

Third, companies that develop business models that take advantage of this trend can expect enormous revenues. Consider the market for relocation services. Every year, half a million service personnel and their families are moved from one place to another. The Department of Defense spends $2 billion to move household goods, and another $6 billion on allowances and indirect costs. But that’s not even the total cost. Service members pay as much as $1,500 in out-of-pocket moving expenses, and they spend 100 to 150 hours of their time in planning the moves. The Department uses more than 1,200 moving companies, and less than 60 percent of customers are satisfied, with claims for loss or damage more than twice as high as civilian claims. If an outside contractor could provide high-quality moving services to all military personnel, it could take control of a multi-billion-dollar market.

References List :
1. Harvard Business Review, September 2004, “New Business with the New Military,” by Mahlon Apgar, IV and John M. Keane. ⓒ Copyright 2004 by The President and Fellows of Harvard College. All rights reserved.