Defence & Intelligence

Defense Offsets – Obligation or Opportunity?

The Global Offsets and Countertrade Association (GOCA) conference just concluded in Montreal.  You may ask, “What is an offset and why is it important?”   Defense offset agreements are arrangements in which the seller of a product or service agrees to provide benefits such as buying local products or services from a country as an inducement for the sale.  Basically when a government is spending significant amount of money on defence equipment they require the companies winning those contracts to invest in country. For example, if a ship or fighter aircraft are purchased by a country, they may ask that a portion of the contract be executed in country by hiring local suppliers delivering locally produced products or to invest in more indirect ways such as R&D or venture capital spend.  Offset agreements are legal trade practices in the aerospace and military industries and when applied become part of the contract terms and conditions.

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Every country approaches offsets or industrial participation differently, with various rules and requirements but in most cases they look for offsets equal to 100% Total Contract Value with the desire to build local industry most often focused on defence and new innovation.  IBM is particularly well suited to support prime contractors requiring offset credits because of its global footprint in 175 countries, global delivery centers, extensive international supply chain, multifaceted R&D labs and more.  IBM employs local citizens in high tech jobs which is beneficial particularly when jobs are most government’s primary focus.  In addition IBM often aligns our investments to government priorities which means we are driving skills enhancement, advanced research and industry development in the topics of interest to the country.  Defence companies often do not have robust in-county footprints and a partner like IBM can be invaluable in assisting them in fulfilling their offset obligations.

Since 2008 when IBM Canada won work on the Halifax Class Modernization ship building program as a subcontractor to Lockheed Martin, they have built a robust offset program.  IBM Canada has delivered over $320M in offsets to several defence suppliers and have been able to leverage the Canadian offset program to drive new direct defence business, develop new R&D collaborations  and secure new government and corporate funding.   In Canada alone, over $475 million dollars is pumped into research in areas of interest to defence suppliers and the government: Cybersecurity, Energy, Transportation, Advanced Manufacturing, Cleantech, Oceans/Marine to name a few. These investments position IBM not only as a valuable defence supplier but also as an industrial participation partner.  In exchange for delivering these offsets, IBM Canada has gained overt $50M in new business.

Recently IBM Canada has partnered with defence suppliers and the Canadian Institute for Military and Veteran’s Health Research to fund big data and analytics R&D focused on this important topic. This creates a “win-win-win” approach – the government is delighted with these new R&D investments in Canada focused on a key government priority, the Defence supplier gets a better ROI on their investment in terms of offsets when R&D multipliers are applied and IBM is able to fund much larger research initiatives than otherwise possible – all of which lays the foundation for future new business.

Defense offset requirements are often viewed by companies as a costly compliance exercise but IBM Canada has demonstrated there is a significant business development opportunity that goes well beyond delivering our defence capabilities to positioning IBM as a strategic, preferred partner.  Offset requirements should be viewed as an opportunity for all to benefit, not just an obligation to somehow satisfy.

Global Defense & Intel Segment Leader

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