Israel should learn from the US how to control military spending.

It is now an almost inescapable fact that in order to reign in the national budget deficit and place the Israeli economy back on a path of sustained economic growth, government expenditures will have to be substantially reduced. After the upcoming round of budget cuts is complete, the Ministry of Defense alone may see that its budget has been reduced by half a billion shekels.

But in the era of the global war on terror and increased regional instability, is it wise for the State of Israel to so drastically cut defense expenditures for the sake of economic growth?

The answer is, it depends on how and where you cut. In fact, with the right approach, the outsourcing approach, it is possible not only to substantially cut defense expenditures and leave taxpayers with more disposable income to support local businesses, it is even possible to simultaneously improve the overall capability and combat effectiveness of the IDF.

The most common argument advanced by the opponents of a reduction in defense expenditures is that it will harm national security. However, these opponents should take note that, since the early 1990's, the US Department of Defense has been able to simultaneously cut expenses and improve the combat edge of the US armed forces through the outsourcing of "noncore" activities.

The American logic is that, in order to ensure modernization, to maintain combat readiness, and to improve the overall quality of the military, the Defense Department needs to be relieved of the burden of internally managing non-combat related services, e.g., medical and psychological services, housing, construction, and food services. Once the military is relieved of the burden of providing these services in-house, it can focus its energies, talents, and resources on improving its core competencies. The military's core competencies naturally revolve around training for and conducting warfare.

Note that, in the outsourcing approach, a lower defense budget does not mean the elimination of essential non-core services. On the contrary, an even higher level and quality of services can be offered by taking advantage of the greater efficiency of private sector provision. The American experience with outsourcing military services has been so positive that, last year, "The Third Wave" of outsourcing was launched. Private firms now compete for the provision of all non-core services formerly supplied in-house by the US Military.

How much will we save?

Although no studies have yet been conducted in Israel on how much could be saved by outsourcing non-core military services, the American data show that, on average, defense spending was lower by 34% after the outsourcing of services began. As a particular example, when the US defense logistics agency decided to ship parts directly from contractors to users, the agency cut costs by 25-35% and improved response time by 75-90%.

Even in the private sector, relatively efficient large firms can gain from outsourcing. Boeing and General Motors reported savings of 10-30% when they began outsourcing their non-core functions. So, assuming that the IDF is not as efficient as a large American company but no more or less efficient than the American military prior to its First Wave of outsourcing, IDF outsourcing should cut costs of operation by at least 30%.

The IDF's First Wave?

In fact, the IDF may not be so far behind the times. The Home Front Command recently announced that they are looking into the privatization of gas mask distribution. Will this herald the IDF's First Wave of outsourcing? If it does, here are a number of other activities that the IDF should consider adding to the First Wave; the maintenance of military bases, military housing and military aircrafts and vehicles; the distribution and transportation of military equipment; warehousing and logistics functions.

If all of these activities were outsourced, it is certainly not inconceivable, given the American experience, that our soldiers would be more consistently trained and freed up to concentrate their efforts on sharpening the skills necessary for conducting modern warfare. Therefore, as a result of a large First Wave of IDF outsourcing, our national security can be enhanced at the same time that the tax burden on the Israeli population is reduced.

The next steps

It would be wise for our defense officials and policy makers to also start thinking about the Second and Third Waves of IDF outsourcing. A particularly fruitful area for additional outsourcing in a Second Wave is non-combat reserve duty. The current system, in which full-time, high salaried employees are removed from the work force for two weeks to a month, is well known to cost businesses and taxpayers dearly. Logistically, non-combat reserve soldiers can be easily replaced with private security personnel.

The substitution of private security personnel for non-combat reserve soldiers would have at least two major benefits. First, it would lower the overall cost to society of providing security thus increasing disposable income. Second, it would increase the demand for security personnel. The increased demand would most probably translate into reduced unemployment and hence fewer national insurance payments being financed by the working population. As a result, purchasing power in Israel will increase, further fueling economic growth.

So what's left to outsource in the Third Wave? As the IDF becomes a more efficient organization it is very likely that it will find itself with a considerable surplus of conscripts. These surplus conscripts would certainly be more efficiently allocated, and hence would further contribute to economic growth, by being allowed to join the civilian labor force or being allowed to invest in additional human capital through higher education.

But this begs the question, who will determine who is a surplus conscript and who is not? Here there is more room for learning from the Americans. In the Third Wave, we could let market forces and individuals themselves decide who serves in the military. This is surely better than permitting our politicians to make this important decision for us. Thus, in Israel, a fully professional, volunteer army is not the starting point for introducing outsourcing reforms, as it was in the US, but is rather the ultimate military outsourcing solution.