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Performance-based logistics (PBL) is an approach to the design of procurement and maintenance contracts that is already being used by the public sector and private industry, mainly outside Europe. Most European governments and many of the region’s defense companies have struggled to implement PBL, even though it has been proven to help to address the four core challenges that all armed forces in the West confront: military personnel shortages, increasingly complex weapon systems, and innovation and cost pressures. None of these challenges appears to be solvable using conventional procurement
and maintenance approaches.
PBL involves long-term collaboration that includes planning for all associated requirements, a clearly specified set of services to be provided, and transfer to the contractor of responsibility for the operational readiness of complex systems. These goals are achieved by establishing and monitoring key performance indicators (KPI) and by transparent communication between both parties.
For the armed forces, PBL contracts reduce staff workload and release personnel for core military tasks. PBL contracts also ensure predictable long-term budget outflows. For the defense industry, PBL increases contractual flexibility, improves efficiency and generates long-term, consistent cash inflows, supporting investments in infrastructure, personnel, and IT.
However, there is no one-size-fits-all PBL solution. Contracts must be specifically adapted to the client’s operational objectives, the contractor’s market position, and the weapon system being procured. Drawing on our extensive project experience, Strategy& has developed a framework for supporting the set-up of PBL contracts which enables both clients and contractors to achieve maximum mutual benefits.
Three key building blocks
It is clear from recent PBL projects that success depends on highly customized solutions. Each project must be evaluated individually by the public sector client according to its current circumstances and its desired objective for the weapon system. Different building blocks must then be selected to customize the PBL approach to achieve this objective.
We have identified three strategic building blocks that decisively influence the characteristics and implementation of a PBL project. The challenge is to select which elements of the right building blocks fit the specific project goal.
Outlook: Upcoming challenges for non-PBL users
Currently, the foundations are being laid for increasingly widespread use of PBL by armed forces in the West. Clients and contractors who persist with non-PBL contracts risk falling behind competitors.
On the client side, countries which incentivize suppliers via PBL will be favored by contractors in the event of equipment shortages. Furthermore, countries that use PBL for the same weapon system from the same industry partner will achieve significantly better operational readiness than those that do not. For both these reasons, pressure is bound to increase on clients favoring non-PBL tenders to convert to PBL contracts.
On the contractor side, defense companies that do not use PBL will become industry laggards given that PBL contracts are becoming the norm for most countries. Companies will struggle to participate in future tenders if they do not catch up now with this accelerating trend.
These negative outcomes are either entirely avoidable or can at least be mitigated. The steps we have outlined in this report lead to a positive future where clients and contractors can work together to achieve mutually beneficial results through rigorous, creative use of PBL.
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