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In April of 2016, during a speech to a room full of NATO allies in Brussels, then-U.S. Deputy Secretary of Defense Bob Work invoked an obscure phrase from the modern military vernacular. With China and Russia rapidly improving their military capabilities at sea, in the air, and on land, Work said it’s time for the United States to explore “the Third Offset strategy.”
“We believe quite strongly that the technological sauce of the Third Offset is going to be advances in artificial intelligence (AI) and autonomy,” Work said.
An “offset” is any strategy that attempts to fundamentally change the conditions of conflict. Rather than trying to match an adversary tank-for-tank, plane-for-plane, or person-for-person, the United States has sought to develop asymmetrical advantages that offset a competitor’s strengths as a decades-long deterrent to global conflict.
In the 1950s, the first offset was the development of nuclear superiority, which offset the Soviet Union’s quantitative advantage in conventional forces. By the 1980s, the Soviet Union achieved nuclear parity with the United States, requiring a second offset: smart munitions and precision-guided weaponry.
“The Third Offset is still being defined,” says Sam Gordy, general manager, IBM U.S. Federal. “But the fundamental component is that advanced computing — including machine learning and artificial intelligence — will improve capabilities and allow the United States to respond faster to rising threats. It’s changing how we define war, because the next war will be fought and won in cyberspace.”
Defense spending has a long history of fueling the development of transformational technology — everything from GPS, cellular communications, and the internet, to jet engines and drones. Work’s pronouncement that AI now occupies a central role in U.S. military strategy communicates two important things to businesses. First, that AI is fast becoming the new basis of competitive advantage, militarily and economically. And second, because the private sector is playing an outsized role in advancement of this technology, business leaders must carefully consider the nature of their partnerships with defense agencies.
Public defense, private enterprise
The modern-day blurring of boundaries between public defense and private enterprise makes the Third Offset strategy distinct from the previous two. Industry has always played an important role in supporting military strategy. For example, IBM computers helped calculate complex particle physics problems at Los Alamos labs in the 1950s, work that led to creating the First Offset.
Today, however, large businesses are more intimately involved in the messy world of geopolitical gamesmanship. First, as economic proxies of their home country, they are often the targets of state-sponsored cyberwarfare, as sources of income, valuable information, or economic retaliation.
“When North Korea hacks a movie company and costs them billions of dollars, is this an act of war?” asks Gordy. “The technology is moving faster than law or policy can keep up. Any business leader should be concerned about that.”
Second, more than in any previous offset, the commercial sector is the supplier of the advanced artificial intelligence that will support U.S. defense efforts. “One of the fundamental differences with the Third Offset is that you have a civilian economy that is moving faster on the technology than the military,” says Peter Singer, a strategist and senior fellow at New America, a Washington, D.C.-based think tank. “And it’s hard to gain a military advantage on something that is widely commercially available.”
The U.S. government has been open about this challenge. In fact, Work was the first to admit that the government is lagging well behind the commercial sector in AI development.
“Government R&D structures developed stealth and precision-guided munitions and new sensors,” Work told his audience in Brussels. “But today, almost all of the technology that is of important in the future is coming from the commercial sector, and the technology base is global. So that means any competitor or adversary is going to have access to these technologies.”
 Process over product
As with previous offsets, the infusion of government resources and the purposeful application of defense R&D to artificial intelligence will likely supercharge development of new solutions. So for those private companies that choose to partner with defense agencies on these efforts, there is the promise of a virtuous cycle of technology development.
“Working alongside the government doesn’t benefit only technology companies,” says IBM’s Gordy. “The work we’re doing in the automotive industry around logistics and preventive maintenance parallels helps maintain fleet readiness for the Army. And the AI technology used to identify insider trading is similar to what military intelligence needs to identify insider threats.”
Perhaps the most important lesson both business and government can learn from the Third Offset, though, has nothing to do with the technology itself. Rather, this evolving military effort may be a revealing testbed for how the deployment of advanced artificial intelligence can force change — both operational and cultural — throughout a large, unwieldy organization.
“When we talk about the Third Offset, it’s not just about technology,” says Gordy. “We talk about process. The technology is an enabler. The difference-maker is what you do with it — your tactics, techniques and procedures.”
Ultimately, the pursuit of AI as a Third Offset will yield both new technology and new organizational processes for the public and private sectors. Business leaders will need to carefully consider how best to work with government in these efforts. What technology do they share? What do they hold back? And what can they expect in return as far as first-mover advantage?
“It’s the same in war as it is in business,” says Singer. “It’s about staying agile and innovative. And it’s not just about the tools you have, but how you use them.”

This article was prepared by our partner, IBM, and edited by Techonomy Media.