"The Third U.S. Offset Strategy and its Implications for Partners and Allies"

DEPUTY SECRETARY OF DEFENSE BOB WORK: Well, good morning, and thank you, Michele, for that kind introduction.

And I would like -- it's so great, on the record, the department -- the secretary -- deputy secretary of defense believes that all think tanks are created equal. Off the record, because of my year at CNAS, it holds such a close part of my heart, and it's great to be back here in the beautiful Willard Hotel with a lot of friends and colleagues of this great organization who puts together quality events like this.

Now, the secretary, or the Department of Defense has a pretty simple mission. It is the most complex, bureaucratic, unwieldy organization in the world. It has one key business. That is to organize, train and equip an American joint force that is ready for war and is operated forward to preserve the peace. That's what we do.

Now, the deputy secretary has generally two general rules as the chief operating officer of this big enterprise. One is to focus on the capabilities, the capacities and the readiness of the joint force, both now and in the future. We refer to that as the defense program. And the second thing is to make sure – or try to make sure that the enterprise operates efficiently so that every single dollar we spend or our taxpayers give us comes about, or is used in a very smart way.

So this morning, as both Gen. Palomeros and Michele [Flournoy] told you, I want to talk about the future of the defense program, something that the department is thinking a lot about as it comes out of 13 years -- 13 straight years of war. And that is the department's innovation initiative, the Defense Innovation Initiative, and what we refer to right now as the third offset strategy, or perhaps more accurately to everyone here, offset strategies.

This was announced in November by Secretary Hagel. And I know the topics of innovation, experimentation, and developing new ways of operating are a keen interest of this group and many, many others besides. Now, they're being pursued in the context of one of the most volatile security environments that we have faced in decades, perhaps as complex as any time since the end of World War II.

So I want to briefly discuss some of the security challenges that I know you know we're facing, as well as those of our allies, and especially those of NATO, and how those challenges are informing our fiscal year 2016 budget request which we will deliver to the Congress on the 2nd of February, this coming Monday.

And we began our fiscal year (FY) 2016 budget deliberations this past fall as the international security environment was being shaken by three really large geopolitical surprises, all of which required a robust response. First, as you know, in February and March 2014, Russia used unconventional means to destabilize, illegally occupy and annex Crimea. Russia then sponsored and encouraged separatist activity in eastern Ukraine, violating international law and Ukraine's sovereignty and territorial integrity.

Now, these actions worked to reshape the boundaries of a major European state. I think it shocked everyone, surprised everyone. It shocked everyone in Europe and the United States. And it may herald -- these are early days -- it may herald a period of prolonged and heightened tension with Russia unless Moscow is convinced to change its course.

The second came in June, when ISIL, the Islamic State in Islamic Levant, now called ISIS, launched an offensive out of northeast Syria into Iraq. They quickly routed four Iraqi divisions. They captured Mosul, a large city. They overran al-Anbar province. They effectively erased the border between Syria and Iraq, and threatened Baghdad itself.

Now, the threat to our people and our interests, and as an opportunity to partner with a new, more inclusive Iraqi government, compelled us, the United States and our allies and partners to forge a coalition and to use force in Iraq once again to confront this growing threat.

Now, the third event came in August. That's when the scale and breadth of the Ebola outbreak surprised the world. The Center for Disease Control did an estimate that unless there was a major international response, as many as 1.4 million people could be infected in West Africa by this terrible virus by the turn of the year. And so in response, President Obama spearheaded an international effort to confront this threat posed by Ebola and its potential threat.

Now, that was -- (inaudible) -- in August is when we start to do what is called the fall review, where we start to put together the program and the budget, which is then delivered to Congress in February. Now, fortunately, because of the assistance provided by the United States and its allies and our international partners, it now looks like the trend lines for Ebola are breaking in our favor. And it appears -- it appears right now that it's on its way to being contained, although this is going to require close monitoring -- (inaudible) -- between now, and continued international assistance.

In Iraq, coalition airstrikes synchronized with our partners on the ground have steadily degraded ISIL's capabilities and helped stop their advances. They are on a defensive -- essentially a defensive posture right now, while teams of U.S. and coalition advisers have helped Iraqi and Kurdish security forces to regenerate, restructure and begin to take the fight to the enemy.

Now, Russia poses a different challenge. It's modernizing a military that was in steep decline throughout the 1990s and the early 2000s. Its naval and air units are operating at a pace and an extent that hasn't been seen in quite some time, to include a large increase in trans-oceanic and global military operations. And as General Dempsey has said, Russia's activities in the Ukraine are, quote, "giving the world a disturbing image of the hybrid nature of military aggression in the 21st century."

Now, a combination of sanctions and rapid and steep drop in oil prices have put Moscow under pressure and shows that there are consequences to its actions. But without question, Russia continues its aggressive behavior. So together, the United States and its NATO allies have demonstrated that we are upholding the principle that a bigger nation cannot bully a small one and we are opposing Russian aggression, supporting Ukraine's democracy, and reassuring our NATO allies.

As President Obama has said, Ukraine should not be able to -- should -- excuse me -- should be able to choose its own future. And we reject any talk of a sphere of influence. And speaking in Estonia this past September, the president made it clear that our commitment to our NATO allies in the face of Russian aggression is unwavering. As he said it, in this alliance there are no old members and there are no new members. There are no junior partners and there are no senior partners. There are just allies, pure and simple. And we will defend the territorial integrity of every single ally.

Now, as you know, the U.S. is working to ensure we have the right military presence in Europe. We're looking at the plans that we had. We're determining whether or not we need to change them. We're looking at increased troop rotations, more joint training, more exercises. We're working to improve NATO's ability to deploy faster in time of crisis, including enhancing NATO's rapid response force.

And we are also improving infrastructure right now at facilities that will help receive rapid reinforcements throughout eastern Europe. We continue to help build partnership capacity, particularly in our allies in the Baltics. And in support, you will see on Monday in our budget submission there will be $800 million to continue these activities under the European Reassurance Initiative, which I think you all have heard that we announced this past fall.

Now, even as we do these things, DOD, in concert with our allies, continues to closely monitor Russia and events in Eastern Europe. And we will continue to determine and constantly analyze whether or not further adjustments are needed to our presence there and our force capacities, capabilities and readiness.

Now, these surprises come on top of an already volatile security environment. We are drawing down our combat operations in Afghanistan and moving over to a train, advise and assist posture. We have ongoing negotiations, hard negotiations with Iran over their pursuit of a nuclear weapon. We're dealing with China's provocative actions in the East and South China Seas. And we all live in a global cyber environment that culminated, at least in the public's eye, I think, with the hack of the Sony network this past November and December.

So it's in this very predictable and unpredictable and volatile environment that we started our fall budget review. It's kind of early days in all three of these crises, but we needed to put together a coherent budget. So we started with one important question: Did these surprises fundamentally change the assumptions that underpinned our current defense strategy that was outlined in the 2014 Quadrennial Defense Review? And we looked at the force planning construct to the degree, and we asked ourselves: Has it changed?

And the short answer that we concluded in the fall review was, no, at least not yet. We think the strategic priorities that were identified in the QDR, and there were five of them -- rebalancing to the Asia-Pacific region: two, maintaining a strong commitment to security and stability in Europe and the Middle East; three, sustaining a global counterterrorism campaign; four, strengthening key allies and partnerships; five, and prioritizing key modernization efforts.

And we think those five priorities still are germane. But we also recognize that the assumptions that underpin them, especially those that deal about European security and what it will take to maintain peace and security in the Middle East, are going to require constant reevaluation. And so as you all know, we've dropped -- we're going to drop the budget for a fiscal year that starts in October, trying to figure out whether, you know, what's going to happen 18 months from now.

We are already starting, God help me (Laughter), we're already starting the fiscal '17 budget review, which will conclude next February, and we will make continual adjustments as we go along.

And we reached the same conclusion for the strategy's force planning construct, and that calls for a United States joint force that in peacetime does three things. One, it defends the homeland. Two, we conduct a global counterterrorism campaign in conjunction with our partners. And three, we assure our allies and deter potential adversaries in multiple regions around the world.

Now, at any time, if deterrence fails, then we'll have a force that is big enough that would defeat or deny an adversary in one region in a very large multi-phased joint campaign, and have the capability to simultaneously deny an opportunistic aggressor in a second theater from reaching their objectives or imposing extreme costs on them at the same time.

Now, we concluded that we were pretty good in our force structure in that regard, with one key exception, and that turned out to be intelligence surveillance and reconnaissance. For all of those of you in this business, you know you can never have enough. It's a constant guess. And no matter where you end up, you always need more. So we're probably going to be -- you'll see on Monday that we'll probably be adding more in that regard.

But we think we can execute the 2014 strategy at manageable levels of risk, at least right now, with elevated risks in some areas -- ISR, certain things. That said, as we survey this very volatile and complex strategic landscape, we believe that the risks are increasing over time. The uncertainty of what is happening and the way these things may progress is rising.

Consequently, we continue to closely scrutinize our strategy, and whether or not our force structure and our global posture and our alliances are strong enough, and is keeping pace with the unrelenting and in some cases increased demands throughout the globe.

But now to what I really want to talk about, and that is it's become very clear to us that our military's long comfortable technological edge -- the United States has relied on a technological edge ever since, well even in World War II. We've relied upon it for so long, it's steadily eroding.

Now, we still believe we have a margin, but the margin is steadily eroding and it's making us uncomfortable. We believe this is one of the greatest strategic challenges facing the department. And it's ultimately will -- (inaudible) -- a challenge that faces -- that impacts America's leadership around the globe.

While the United States and our closest allies fought two lengthy wars over the past 13 years, the rest of our -- the rest of the world and our potential adversaries were seeing how we operated. They looked at our advantages. They studied them. They analyzed them. They looked for weaknesses. And then they set about devising ways to counter our technological over-match.

So across the board, we see rapid developments in nuclear weapons, modernization of nuclear weapons; new anti-ship, anti-air missiles; long-range strike missiles; counter-space capabilities; cyber capabilities; electronic warfare capabilities; special operations capabilities that are operated at the lower end. All are designed to counter our traditional military strengths and our preferred way of operating.

As a global military power, much of our military operates overseas, as you know. We generally fight away games in concert with allies and partners whenever possible. So our ability to project dominant military forces across the trans-oceanic distances underwrites U.S. conventional deterrence.

And so for that reason, the 2014 QDR prioritized overcome -- trying to overcome better the constant and ever-present tyranny of distance which the United States operates with, and defeating adversaries in contested environments far from our shores.

Now, we believe that our ability to project power, coupled with strong alliances and partnership overseas, has underwritten global stability and prosperity for decades, whether it be in Asia, in Europe, or the Middle East. If our ability to project power seemed to be eroded, it could strain our alliances and partnerships, resulting in a far more dangerous and unstable world, in our view.

Our perceived inability to achieve a power projection over-match, or an over-match in operations, clearly undermine, we think, our ability to deter potential adversaries. And we simply cannot allow that to happen.

Now, what gives us all pause is that the military of our potential competitors around the world have been rising since 2001. And over that period of time, spending by our allies and partners has generally, not in every case, but has generally declined. China's defense budget has double-digit growth nearly every year over the past decade. And both Russia and China are fielding very advanced capabilities at an extremely rapid pace.

What's more, some of the potential competitors are letting us do the research and development, then they steal it from us through cyber theft and they go right to development, rather than spending their own resources on Research and Development (R&D).

I often describe it as they have a farm-to-market mentality, and we have this very industrial thing where we grow stuff, we put it in freezers, we transport it across long distances. By the time you get it on your table, you don't know how old it is. Sometimes it's too old; doesn't taste good. It's a bad situation. (Laughter).

So to maintain our warfighting edge, we're trying to address this erosion -- our perceived erosion of technological superiority with the Defense Innovation Initiative and the third offset strategy. Now, as Secretary Hagel said, this new initiative is an ambitious department-wide effort to identify and invest in innovative ways to sustain and advance America's military dominance for the 21st century.

It will put new resources behind innovation and you will see that in our budget. But it also accounts for today's fiscal realities by focusing our investments that will sharpen our military edge even as we have to contend with fewer resources.

Now, as you will see when we drop our budget on Tuesday, it seeks to reverse this decline in defense spending in the past five years. We will ask -- the president will ask for the money that he believes is required to defend the nation. And it works to address the under-investment in new technologies by making targeted investments in those areas. Specifically, if you go to the 2014 QDR, you will see a one-to-one kind of where the money is going, based on a strategic review, and particularly in research, development and procurement.

Now, we make significant investments in our nuclear enterprise; new space capabilities; advanced sensors, communications and munitions for power projection in contested environments; missile defense; and cyber capabilities. We are also investing in promising new technologies, including unmanned undersea vehicles; advanced sea mines; high-speed strike weapons; advanced aeronautics; from new engines to new, different types of prototypes; electromagnetic rail guns; and high-energy lasers.

But the Defense Innovation Initiative (DII) and the third offset strategy, or strategies, are much more than just technology. They're about increasing the competitive advantage of our American forces and our allies over the coming decades.

So, I think most of you know this, but let me just quickly go through what I mean by an offset strategy. In the Cold War, the U.S. and its NATO allies sought a series of competitive advantages over the Soviet Union, a means by which to offset their very, very great conventional strength. The United States actually pursued two offset strategies. The first came with President Eisenhower's New Look Strategy in the early 1950s. When President Eisenhower came into office in 1953, the United States was heavily outnumbered by the Soviet conventional superiority on the European central front.

Eisenhower estimated it would take 92 U.S. and NATO divisions to have any chance of checking, at the time, 175 Soviet divisions. But a force that size, with Europe rebuilding itself after the Second World War, and with the United States starting to try to balance its budget for a long-term competition with the Soviet Union, it was neither politically or economically viable.

So to counter Soviet superiority without bankrupting the West, Eisenhower directed a top-level strategic review which resulted in what was called the New Look. And that said the U.S. would reduce military manpower and would rely instead on its nuclear arsenal, where we had a big advantage at the time, for deterrence. We had a very substantial lead at the time, and that technological advantage in nuclear weapons and their delivery systems provided the most effective offset to Soviet strength and their geographical advantage.

Now, if you look back, it's kind of crazy when you look back and you say, "Wow, you know, we were planning to drop so many nuclear bombs everywhere." It was a different time. But it did provide a credible deterrence, without question. And it enabled Eisenhower to actually reduce spending from the levels that were originally projected.

And like all -- but like all military advantages, the Soviets felt its sting and they started to do something about it. And they started to gradually build up their tactical and nuclear -- strategic nuclear forces. And so by the 1970s, we really didn't have a credible -- it was no longer a credible deterrence. The dangers of nuclear escalation were just too high.

So in response, in the 1970s, we developed a second offset strategy. Now, the key operational challenge that we were trying to do is the Soviets were going to attack in echelon forces that came very, very deep behind what was then called the FEBA -- the forward edge of the battle area, or the forward line of troops (FLOT). You know, we have to have acronyms.

And how do you do that without resorting to nuclear weapons? So in the summer of 1973, what would later become the Defense Advanced Research Projects Agency, or DARPA, launched a project called the Long-Range Research and Development Planning Program. And it was to provide the president and the joint force with better tools to respond to a Warsaw Pact attack.

It recommended going after conventional weapons with near-zero miss, a very simple idea that had profound implications throughout the entire defense program. In 1977, Defense Secretary Harold Brown and his Under Secretary of Research and Engineering William Perry -- I mean, these were just great thinkers in the Cold War. They set about developing this next offset strategy and they assigned DARPA the responsibility for integrating all of these promising military technologies into a system of systems for deep attack, which they called "assault breaker."

It called for aircraft with light area sensor cueing, surface-to-surface ballistic missiles that could dispense a blanket of anti-armor submunitions. And it culminated in a very successful demonstration in 1982 at the White Sands Missile Range in New Mexico. And as it turned out, the Soviets were watching. And the implications of that single demonstration, along with all of the ferment that was going on in the joint force at the time, really caused them to pause.

And by 1984, general -- the Soviet General Staff -- chief head of the Soviet General Staff, Marshall (inaudible), he said, "Look, these reconnaissance strike complexes" -- that was the Soviet word for them -- "using very accurate terminally guided conventional munitions, would achieve the same destructive effects as tactical nuclear weapons." They were very model-driven at that time. They cranked their models and they said, "game over."

And we had actually picked a competitive advantage that we knew our adversary, the Soviets, could not duplicate, and therefore injected uncertainty in their minds, changing their war-fighting calculus.

Now, the Assault Breaker Program was picked up by the joint force. Army and the Air Force started to talk about air-land battle. That later became follow-on forces attack with our NATO allies, and ideas like discriminate deterrence. And they saw the potential. I mean, it was truly a very energizing time.

I was at that time a young 1st, 2nd lieutenant in the Marine Corps, a captain, then a major. And I just cannot tell you the intellectual ferment that was going on in the joint force at the time.

Now, we continued to build that even in an era of declining budgets, starting in 1985. And we were the clear beneficiary of this. We were an aggressive first mover. We had picked an area that we knew our potential -- our most likely adversary couldn't copy. And we demonstrated in 1991 to the rest of the world, and it really had a giant impact.

We were in the very, very early stages of what we called "battle networks," but against a very early battle network with just relatively a few number of precision-guided weapons. The Iraqi heavy formations that were built on the Soviet model were virtually reduced to an array of targets and (inaudible). And they were again in 2003 during the initial invasion of Iraq war.

So the second offset strategy proved decades-long enduring, just like the first did, providing the U.S. military and its allies with a decisive operational advantage that has lasted now for nearly four decades. But just as with the first offset strategy, the second offset strategy is showing its teeth. We're now starting to see the capabilities and the advantages that it accrues to us is starting to erode and at an accelerating pace.

And to ensure that we maintain conventional deterrence, we're seeking a third offset strategy now that will maintain and perhaps advance the competitive advantage of America and its military allies.

Now, this effort is not a department -- a departure from the current strategy in 2014 in any way. It's completely in line with its emphasis on innovation. It's about developing the means to offset advantages or advances in anti-access area denial weapons and other advanced technologies that we see proliferating around the world.

Now, the execution of a successful defense strategy is ultimately about balancing ways and means, as this audience know. And it's primarily about changing our ways and means right now and the operational concepts we use to achieve our objectives.

Now, there's three things, though, I want to make a difference. There's going to be three key differences between what is happening in this offset strategy and the earlier ones. First, it's going to have a much more trying temporal component. In 1975 and in the 1950s, we knew our adversary and we said, "We can pick something where we will have an enduring advantage." We don't think we're in that type of environment right now.

So, we'll be looking for promising technologies that we can do in what we call the FYDP, the future years defense program, generally about five years out. We'll identify long-range advances that we can pull up and hopefully field in the '20s, and then we'll plant the seeds for R&D, which will give us an advantage for the '30s.

So we're actually thinking of this in terms of a never-ending -- we're constantly updating this strategy, rather than trying to pick the one single unitary field theory that's going to make that work.

Second, we don't face a single monolithic or implacable adversary like we did in the Cold War. We face multiple potential competitors, from small regional states like North Korea and Iran, to large advanced states like Russia and China, to non-state adversaries and actors with advanced capabilities.

Each of these are probably going to require a different approach and a different strategy, which is why we actually say "offset strategies." As applied to Europe, for example, we're probably going to have to have a high technology component as well as an innovative whole-of-government concept to counter the ambiguous hybrid threats we saw in Crimea and we continue to see in Ukraine today.

And the third big difference is that in the 1950s and the 1970s, generally these advances were military capabilities that were brought along by military labs. But now with robotics, autonomous operating guidance and control systems, visualization, biotechnology, miniaturization, advanced computing and big data, and additive manufacturing like 3D printing, all those are being driven by the commercial sector.

And what makes it harder for us now is in 1975 when you go back and look at the Long-Range Research and Development Planning Program (LRRDPP) at that point, people from industry were actually leading the panels. We can't do that anymore because it would give some type of unfair advantage to people that we'd bring in. We must really capture the commercial sector and we're trying to work our way through this right now.

When you consider these three different competitive environments, this is really like the inter-war period. There was all sorts of technology things going on. There was advances in radar and sonar sensors. There were advances in aviation. There were advances in maritime capabilities, submarines. There was mechanizations. There were radios.

It was the people who could pick and choose and put them together in an innovative operation concept that gave them an advantage. And that's what we have to do today. We're not going to be able to pick out one specific strategy that will be good for all potential adversaries and all potential capabilities. It has to be much more, much more innovative and agile.

So there's no silver bullet solutions and we have to put it into -- we have to kind of use war-gaming and operational concept development and discussions with our allies and discussions with our commercial partners to try to figure out our way through this.

And I would just like to end that what was so critical about the initial, or the second offset strategy, and the first when you look at the dual-capable aircraft that we have throughout the alliance right now, was the importance of our NATO allies and our partnerships. In '75, we actually formed what was called the European-American Workshop, a very innocuous name, but it was focused on trying to figure out together how this offset strategy would work.

And so we need to work again with our allies, and we intend to do so. I recently discussed this undertaking in a meeting with my British counterpart. We're going to do other with NATO, as well as our allies in Asia, around the world because there might be different approaches in both regions.

So we face similar challenges in challenges of power projection and military operations. And while deterrence and defense of our allied territory have naturally -- taken focus right now, as Gen. Palomeros said, we have to look to the future and see how can we do better.

I think the U.S. and its allies have a long history of adapting to change and identifying new approaches that pit our enduring strengths against the vulnerabilities of our adversaries. And it has been absolutely vital to work with our allies.

Just a couple of points. I know I'm running a little long here.

First, the critical importance of interdependence with our allies. That's, as I said. The department is trying to deepen our cooperation with our close allies and partners. We're collaborating -- collaboratively planning now on our roles, missions and investments in future capabilities.

It's important that we look at this as an alliance. Each of our alliance members have certain key advantage or certain key things that they really, really are good at. We don't need a lot of duplication, especially at the depressed defense levels that we have now.

So if we approach this as an alliance and figure out where the technological advantages lie or who is the leader in certain areas, be it undersea technology or mine warfare or advanced missiles, we need to try to work together. We need to try to come up with operational concepts, just like we did with follow-on forces attack, which address problems as an alliance.

So, said another way, we need to be thinking as an alliance about the potential advantage in specialization. Beyond that, many or all of our allies have forces that are capable of absorbing certain types of these capabilities and some now. We shouldn't try to make a cookie-cutter solution just like there will be no cookie-cutter potential adversary.

And we all must recognize that a fear of the technology gap within the alliance is closely related to a growing resource gap. All of us together need to decide this innovation effort is a priority or not; that is, a deliberate effort. And we just can't float along at the resource levels that the alliance is giving to defense right now.

The imperative to meet the challenges I have outlined is part of the reason why allied policymakers and parliaments said in Wales last September that they really needed to get all of the NATO partners to the 2 percent level of national output to defense. And we hope that that is going to be the case.

Now, our NATO allies and NATO itself, they all have existing processes and institutions that focus on these cutting-edge technologies and new concepts. We see it all the time. So, to Gen. Palomeros, let me just say that we look for this effort in NATO -- we look to the leadership of the allied command transformation and its elements like the Joint Warfare Center and the Lessons Learned Center.

We have to embrace, not shy away, from criticism. Those are going to come. I deal with that every day inside the department. We'll surely regret it if in the future, we look back and say we didn't go far enough in this period. So I encourage all of our allies and all of the joint force to be very bold and really push the boundaries of innovation.

You probably all -- many of you have heard me say this -- say, you know, what keeps -- how do you sleep at night? And I say, "I sleep great; I sleep like a baby; I wake up crying every two hours." (Laughter.)

This is a time, though, when great things can happen. Generally, when you have resources that are constrained, if you look in the past, that has actually stimulated thought. There's an awful lot of thought going on right now. We are constantly being moved away from a focus on the future because of the problems of the day. But if we can strike a good balance between the two, then I know in the future the United States military and its allies will continue to have a technological over-match against potential adversaries whenever or wherever we encounter them.

I look forward to your questions.

(Applause.)

MICHELE FLOURNOY: Deputy Secretary Work, thank you so much for a really tremendous exposition of the offset strategy and what it might mean for our trans-Atlantic alliance. You've put a lot of issues on the table.

I'm going to start the discussion with a few questions, and then we'll open it up to the audience.

I want to just start by trying to draw both of you out on the question of what is the problem we're trying to solve. I think one of the risks in the offset strategy -- I think we -- the same thing has happened with transformation, where the term can mean all things to all people. And everything becomes transformational or everything becomes part of the offset strategy.

So I think it -- it makes sense to start thinking in the trans-Atlantic context what are the specific areas of advantage that we're trying to offset. What are the particular challenges, whether it's in power projection or hybrid warfare or regular warfare that for a trans-Atlantic -- the trans-Atlantic community really needs to be the focus areas as we think about offsets?

Do you want to -- do you want to start with that, general?

GENERAL JEAN-PAUL PALOMEROS: From the NATO perspective, really we have to keep the -- (inaudible) -- whatever force multipliers we have today focusing obviously on our big -- (inaudible) -- which are the command and control, the information sharing, intelligence -- (inaudible) -- reconnaissance.

I mean, the core of the permanent mission of the alliance, which makes the glue that the -- (inaudible). That's where I would put -- (inaudible) -- the highest priority.

And then -- and very much in line with what you stressed, I think leadership, training, education and exercises. This is how we will develop new concepts. We cannot -- (inaudible) -- because the world is so demanding and so complex, as you clearly stated, from scratch new concepts or new doctrines. We really have to fashion -- to shape that in accordance on the one hand with what we perceive; and on the other hand with the skills that we have.

And we have -- we are fortunate to have those great leaders. We have young people really motivated. There are still integrating new technology in their own (inaudible) and in their own approach. And they have such tremendous operational experience today that we have to capitalize.

So if we make -- match both, I think we are able to face those challenges. But we have to make priorities. The good news is that when the head of states met in Wales, they set up -- we set up for them and they accepted a list of many shortfalls – (inaudible) shortfalls. Then we have -- we have our road map for the future, how we will address those shortfalls.

And the answer is innovating and seeing how we can match the concept -- (inaudible) -- people, and some breakthrough technologies which we have still to work in NATO.

But -- and to conclude, in NATO, we have this wonderful tool which is the science and technology. This is a wonderful network of very skilled scientists, very much focused on operational effects. And we have not tapped as much as should on this -- on that potential.

So there is still an innovative potential in NATO. And I will call for a new innovative strategy in NATO. This is what we need.

MR. WORK: Well, a lot will depend upon the future actions of Russia. As Gen. Palomeros said, NATO has both challenges in the east right now, as well as challenges to the south. That's why I tried to emphasize that we are not seeking a single strategy that is a cookie-cutter strategy for all of these different capabilities.

This offset strategy that we pursue in the Pacific is focused primarily on overcoming anti-access and area of denial network. Whereas in Europe, it might be something different.

I would actually say also that this is not all about technology. I can't say this enough. First of all, the great strength of the United States and its NATO allies are the capabilities of its servicemen and -women and their ability to adapt to a wide variety of different situations.

So, leadership development is a key aspect of the Defense Innovation Initiative. And I would suggest that what we're trying to do in the Middle East is an offset strategy, too. We're trying instead of us using large ground forces, trying to address those problem in different innovative ways.

So, it is more of a broad-based continual review of what we have in the portfolio of capabilities that would provide us over-matches in different capabilities be it in different areas, be it in an operational concept or a new technology or new ways of approaching a problem.

MS. FLOURNOY: So the specific question is how you both think about structuring collaboration between the United States and its NATO allies in this area. Because we tend to think about primarily the benefits to NATO of the U.S. sharing its thinking, sharing its -- its progress in these areas on innovation and so forth.

But there's also tremendous importance to the United States that at the end of the day, we're not standing there all alone with beautiful technologies that keep our edge, but no more interoperability, no allies that can really join with us when we go to war or dealing with a conflict.

So I think there's interest on both sides to making that collaboration work. What are your initial thoughts on how that should be structured?

General, and then Mr. Secretary?

GEN. PALOMEROS: Well first and foremost, the presence of what was defined as the allied command transformation 10 years ago, 11 years ago -- (inaudible) -- very far-thinking people -- (inaudible) -- was not easy certainly to set up -- (inaudible) organization looking to the future, adapting for -- adapting the alliance.

So we must take the full benefits, and we are really striving through these kind of meetings and the seminars. But not only that, we have a lot of different experimentations. We are working through exercise, concept development. We are innovating in exercise. We are putting more emphasis in the interaction with industry as well.

So we are very much not only driven by the U.S. strategy, but we are inspired by the U.S. strategy. And -- but most importantly, we must keep, if I may say, -- (inaudible) -- the U.S. on board with NATO. I mean, and this is really our objective. So it's through the different initiatives that we have -- we have this -- connected -- forces initiative to reinvigorate exercise, training and education.

We dramatically need, and this is the case -- (inaudible) -- dramatically need the U.S. fully involved and not only to lead, but to provide us with this kind of incentive to move forward and to keep the -- the -- (inaudible) -- interoperability. But what I see today is indisputably a firm and a permanent commitment of our U.S. ally within NATO. There -- shouldn't be any doubt about that.

We must get the best out of that. We must be able perhaps to -- (inaudible -- a little bit of -- (inaudible) -- objective into the U.S. activities to make sure that we can -- (inaudible) -- through concept development, experiment and exercises, to make sure that on the one hand we have not a -- (inaudible) -- organization process, which is -- (fine ?) -- and which is very robust. But on the other hand, -- (inaudible) -- organization processes overturned by the -- (inaudible) -- in a certain way.

And then in a certain way, the U.S. -- (inaudible) -- drifting apart from their commitment to interoperability. This is very practical, but we need to -- check -- that -- (inaudible) -- on a permanent basis.

MR. WORK: The Allied Command transformation does provide us with a platform we didn't have in the mid-'80s. So, we anticipate, again, the secretary of defense just announced this initiative in November. And as you know, we're going through a leadership transition in the department. Dr. Carter's confirmation hearing we believe is on the 4th. And he should -- (inaudible) -- be, you know, confirmed in February.

And so we want to bring on -- we want to get obviously Dr. Carter's views on this. There are meetings that are NATO -- (inaudible) -- coming up this March.

But I do want to pick up something that Gen. Palomeros said. Demonstrations were very important in the Cold War -- the Reforger exercises, the -- Nifty Nugget exercises, different exercises where we actually worked together as an alliance to demonstrate the capabilities.

And I believe one of the things that we will be able to do in the future, you will see, are more demonstrations. And by having demonstrations with our allies, we'll be able to test out different operational concepts on different problems, with different technologies and with different leadership approaches. And so I would expect that to be a very, very important part of how we bring our allies together.

MS. FLOURNOY: General, how worried are you about the -- our European allies being able to really maintain the focus on resources -- focus along the lines of what you're describing on innovation and transformation? You know, we -- at Wales, we saw the readiness action plan put into place, which was more a near-term focus on -- (inaudible) -- assurance. And even already, we've seen some countries really struggling to meet the resources commitments there.

Now, we're asking them at the same time to also perhaps increase their investment in more long-term transformational activities -- their part of a new offset strategy. How worried are you about the resourcing side, about the risk of becoming sort of a two-tier alliance in terms of capabilities and commitments?

GEN. PALOMEROS: Well, this is a permanent concern, and this is not by chance that we are here discussing that, because this is exactly what we need. We need a, as you say, a renaissance or something like that in innovation in Europe. We have the same trends that -- (inaudible) -- in the U.S. and that was -- (inaudible) -- by the way the -- (inaudible) -- last European Council, which was the first dedicated on defense, which is perhaps good news.

So, we have to influence that the best, and I think NATO is really a good organization to do that. I mean, we share 22 nations in common between NATO and the European Union. So and when the head of states and the government meet, they are -- are the same people with the same security concerns, the same objectives.

So, on the other hand, there are tremendous innovative strengths in Europe as well. We see that through middle-size enterprise companies. I will certainly advocate for more trans-Atlantic -- (inaudible) -- for innovation, industry, research and technology. This is, in my perspective, the strategy -- (inaudible) -- conduct, if I may say so, at least for -- as far as NATO is concerned.

This is the strategy -- (inaudible) -- that we have to develop. And this is why this -- this initiative is so important, in my perspective. And that we have to advocate in Europe not to a mirror of that exactly, but to take the strengths of the many innovative companies and research and technology which are really able to bring to NATO something different.

And I'm sure that from what you say, that the U.S. will be interested in these trends, in this innovation, because we have some small countries, but they are no small countries in NATO. We have a lot of good brains, a lot of people able to matching new solution to the questions that we have today, because they are facing the problem. They are at the border of the problems, so they have no alternative but to face the reality.

And then there are -- (inaudible) -- for instance, and I will close with that, we are organizing a network of Center of Excellence, which are -- (inaudible) -- by NATO. This is a wonderful potential because every single nation is putting its best in that, and there are a lot of good brains thinking about concepts on the one hand, so -- and if we are able to network -- (inaudible) -- all these -- (inaudible) -- we will put a kind of gathering of intelligence which will not be matched by any other type of -- innovation.

MR. WORK: I'd just like to pick up. This is really about a balance of resources. And the United States military since FY 2012, through FY 2015, last year's budget submission, we took $790 billion out of our projected future years defense spending, which is what we use to build a balanced program with capabilities, capacities and current readiness to meet the demands of today, and future readiness, which is getting ready for these challenges.

And as we signaled last year, if we go to sequestration, that makes achieving this balance extremely difficult. And that is why I think all of our allies committing to saying they would get to 2 percent of GDP in NATO, and for us avoiding sequestration is extremely important so that we would have the ability to pursue innovative things that would make our future readiness better.

MS. FLOURNOY: I'd like to open up the questions to the audience. If I call on you, please state your name and ask a question.

Yes, ma'am, right here. They will bring -- the microphone is coming.

Q: Hi. It's (inaudible).

Bob, you talked a little bit about the Sony hack. And that brings up a very interesting problem with Internet security and cybersecurity, which is a big issue if we want to keep technological superiority. When we talk about sharing things and sharing technologies, and everybody with a cell phone and a social media account seems to be spreading every secret that there is, how are we going to address the problems of keeping a technological edge in this era of, you know, everything goes out everywhere?

And in -- when your SmartWatch is going to talk to your stove, and everybody with an account is going to post everything -- everywhere, and everything shows up on Twitter, how do we address the allies and the interoperability and trying to keep that technological edge, when -- when we can't keep hardly anything secret anymore?

MR. WORK: When people look at the defense budget, they look for big things -- aircraft carriers, long-range bombers. I will tell you, one of the biggest advances in the PB 16 budget is our going after what are called joint regional security stack (JRSS). Now, what does that mean? Right now, the Department of Defense has over 1,000 firewalls that it has to defend on a daily basis.

Just basic (inaudible), people, you know, giving their code password to someone or doing something, that is an impossible problem. Through the JRSS, a relatively small, modest amount -- we fully funded it -- we will drop to 50 defendable firewalls by FY17. That will make us far more defendable as a network.

We continue to work -- Frank Kendall is working through Better Buying Power 3.0 to put cybersecurity standards inside of our contracts so that we would hold people who work with us accountable for being able to protect their information.

Your point, (inaudible), is exactly right. This is a problem we have. It is a problem I'm certain for the alliance and all of our partners. We're getting after it as fast as we can, but the number of networks that we have is just astounding. And getting those streamlined is going to be the real key to having a dependable network.

MS. FLOURNOY: Yes, in the way back? Sorry.

Standing up over here in the corner?

Q: Thank you. (inaudible) -- question on Russia -- (inaudible) -- briefly.

NATO officials' communication -- military-to-military communications has been suspended with Russia. Some of the partner countries still maintain military-to-military discussions, but the first question: What are the prospects of restoring those communications?

And then the second question is on the Black Sea region, what -- what the assessment is of the Black Sea region. There have been some reports from the alliance about possible movement of nuclear weapons and -- (inaudible) -- into Crimea. So, just your assessment -- (inaudible).

GEN. PALOMEROS: Well, first and foremost, this is not -- (inaudible) -- my responsibility, and my colleague, General Breedlove -- (inaudible). But nevertheless, what I can say that -- (inaudible) -- must avoid is any risk of a miscalculation. And we know that this risk is coming higher and higher the more you have an activity close to the borders of NATO.

And in the alliance, we are really focusing on ensuring our allies of NATO presence and NATO will to do its job as far as protecting freedom, collective security and collective defense. We do that in a very defensive and very visible manner. We are organizing -- (inaudible) -- which are known and -- (inaudible) -- and -- (inaudible) -- those objectives.

We are predictable. And what we ask from -- (inaudible) -- counterparts is to see the same -- (inaudible). And that's why I think it is important to try to restore -- to keep the minimum link to avoid -- (inaudible) -- any misunderstanding or any miscalculation which could have a dramatic effect.

And -- (inaudible) -- on the other hand, a part of our mission -- (inaudible) -- permanent assessment of the strategy -- (inaudible), we are closely monitoring what is happening and the changing in the strategy -- (inaudible) -- with new weapons system, what I call some game-changers, which could deny -- (inaudible) -- access to some strategic part of the alliance or ability to deploy our forces where and when it is needed.

So, and this is a crucial part of day-to-day assessments, and are looking in the future for how to transform the alliance to keep the edge, as we discussed, of those very strategic domains.

MR. WORK: We continue to interact with Russia on a daily basis. We talk with them about the INF Treaty, the Intermediate Nuclear Force Treaty. We talk -- we have cooperation in space. They are cooperating and they are working with us as we work with Iran.

But we have clearly said their actions in Ukraine and Crimea are unacceptable, and we have worked with our NATO allies and our European Union allies to establish relatively tough sanctions. And the president has made clear as far as allies go, Ukraine is not a NATO ally, obviously, but allies -- we will defend every NATO ally and we will pursue other means such as sanctions, et cetera, with what Russia is trying to do in Ukraine.

This is something that's being discussed constantly. It depends upon Russian actions and it is something that continues to evolve from day to day and week to week, depending on how Russia reacts.

MS. FLOURNOY: We have time for one last question.

(inaudible) -- right here -- (inaudible) -- in the front. Why don't you stand up so -- (inaudible).

Q: (inaudible) -- I would like to ask, General, you primarily, about the readiness action plan and your evaluation of it. This was I think a major success coming out of the Wales summit. And a lot has been done to implement it. But it really is focused on deterring Russia from taking the kinds of actions that it took in Crimea and Ukraine, that scale. It focuses on small trip-wires, rapid deployment of a fairly small force of 6,000, and pre-positioning.

And so if the challenge is deterring the Russians from doing what they did in Ukraine, this kind of approach makes sense. The question is: Is it adequate to deter a larger Russian action, should they be dumb enough to do that? I think about -- (inaudible) -- and mobilizing from that. There you're dealing with tens of thousands of troops, right?

What would we have to do to adjust the readiness action plan to deal with that kind of threat?

GEN. PALOMEROS: Well, -- (inaudible) -- for the question, because it -- (inaudible) -- opportunity to -- (inaudible) -- a global perspective -- (inaudible) -- what is and what should be, and what -- (inaudible).

First and foremost, I remember two years ago -- (inaudible) -- I stated that -- (inaudible) -- two main goals of the alliance. And what we are facing is the reality -- (inaudible) -- with what we saw -- (inaudible) -- what we had to take -- (inaudible) -- is the reality that through the reduction in defense -- the injuring reduction -- (inaudible), the alliance and many allied countries have lost part of their readiness. This is not news.

(inaudible) -- and if you listen to the chief of defense, the ministers, it's very clear. So putting readiness at a higher -- the highest in the action there of the Wales summit was part of our -- (inaudible). And we achieved that.

So the -- (inaudible) -- in a nutshell is much, much bigger than -- (inaudible) -- one major risk. This is really a commitment to reinvest in whatever -- (inaudible) -- to build or to rebuild the proper readiness that NATO needs to face the many challenges, the many risks that we have in the north and the east and the south.

So, and this is a long-term commitment. This is a new approach to -- (inaudible). Well, we are not able to predict precisely where and when it will happen, so we must be ready. We must reinvest in training. We must reinvigorate our exercises, and that's exactly what we do under, by the way, our responsibilities.

And we must as well reinvest in those capabilities which will procure us the readiness we have lost -- (inaudible) -- how to, I would say, regenerate the forces, how to reposition our forces mobilities. It's very -- (inaudible) -- and that's why we need to reinvest certain -- (inaudible) -- and we will do that in concurrence with the U.S. and the European Initiative, which is absolutely crucial to rebuild this readiness.

So we must see that in the context and in the perspective if we want really to imagine what is the scope of the readiness action plan. The readiness action plan is here for a long time, so we have really to capitalize on it. The very high joint readiness task force is part of it. It is only part of it. The overall objective is really to regain the readiness of the alliance.

MR. WORK: These readiness action plans are very, very important. We're working closely with our NATO allies on it. But really, this is going to come down to a lot of balance and resources. And as I said, it's very difficult to make a balance between the capacities that you need to respond to Ebola, to ISIL, to Russian actions in Ukraine. It's very hard to have the capacity to respond to that with the proper capabilities and with a balance of current readiness and future readiness at the levels of the budget that would come about if sequestration comes in.

Our -- the sequestration cuts remain in effect in FY, fiscal year 2016 and beyond. So, both for the United States and our NATO allies, we -- this is a very volatile time. It is extremely volatile, very unpredictable. And the margin of risk or the margin of superiority and the number of risks in our view are multiplying. We will make that case on Monday when we drop the budget and we hope to work with our NATO allies to make sure that the resources will give us the ability to handle both current problems, as well as deal with future problems through offset strategies.

MS. FLOURNOY: Well, I think for many of us, this has been a very thought provoking discussion.

General, I'm particularly grateful that you would be here in person and for the partnership that CNAS and (inaudible) have had in hosting this conversation, and hopefully continuing the trans-Atlantic conversation.

And Deputy Secretary Work, we are so grateful to have you back. And so grateful that you've been willing to offer your perspectives and really set the table for what will be ongoing work on our part to support the development of the offset strategy, but also to continue the trans-Atlantic conversation.

So, please join me in thanking our speakers.

(Applause.)