U.S. defense companies seeking to export their product may work either through Direct Commercial Sales (DCS) or the Foreign Military Sales system (FMS). A while back we talked about the benefits of FMS – mainly, that the FMS system facilitates logistic and reduces risk. Of course, DCS offers its own benefits. This week we’ll take a look at the benefits that DCS offers over FMS. Next week, we’ll talk about why DCS vs. FMS is a false dichotomy – in reality, the two should be seen as complementary approaches to military sales.
What differentiates Direct Commercial Sales (DCS)?
DCS means that the U.S. defense company (the vendor) works directly with the foreign government customer to negotiate, finalize, and deliver a sale. The USG is not involved in the sale (although the vendor is required to comply with U.S. regulations regarding military exports). Basically, DCS is any sale not through the FMS/FMF system.
What are the benefits of Direct Commercial Sales?
- Flexibility. With DCS, the vendor might have more flexibility to cater to the customer’s needs. Working through FMS, the customer defines their requirements and then the US DOD procures the standard military item that matches. The DOD also tends to add on the spare parts and training package that they believe are appropriate, which may add significantly to the total cost. Working directly with the customer, the vendor can assemble a package that best fits the customer’s needs and budget.
- Direct Communication. In FMS, the US DOD is the intermediary between the vendor and the customer. Communication filters back and forth through the USG, creating opportunities for miscommunication. DCS bypasses this problem, since the vendor works directly with the customer.
- Fewer Procurement Regulations. Since the USG is not involved in a DCS sale, the deal isn’t subject to USG procurement rules and competitive bidding. However, the sale will probably be subject to the foreign government’s procurement rules, so there might have to be a competitive tender to comply with local regulations.
- (Maybe) More Profitable. In FMS, the DOD negotiates the lowest price on behalf of the foreign government customer. With DCS, the vendor negotiates directly with the customer, so they can charge whatever the market will bear.
- Less Bureaucratic / Faster. Some companies find FMS to be a confusing, lengthy process. Skipping some of the bureaucratic steps involved in FMS might allow the vendor to more quickly negotiate, finalize an agreement, and deliver their product. And this presumably would lead to happier customers, too.
But a caveat: I’ve heard some incorrect beliefs about DCS, namely that DCS is not subject to ITAR Regulations. This is incorrect! Sales through DCS are subject to exactly the same USG regulations as FMS. With DCS, the vendor is responsible for ensuring that the sale is fully compliant with regulations. (With FMS, the DOD handles this for the vendor.)
To see the other side, make sure you also check out the Benefits of FMS.
I also have a handy chart comparing FSM and DCS.