Defense Industry Can Profit Despite Downturn

By Douglas Macgregor and Stephen N. Burke
For the first time in decades, the Defense Department must aggressively pursue value, not simply effort. The current practice of rewarding senior military leaders and defense appointees for effort, time, staff size and budget rather than bold, effective achievement must be arrested. 

In this environment, industry can still profit over the long term by assisting the customer to get where it is ultimately going, whether the customer knows it or not.

Military leaders have an understandable aversion to bold innovation. At a time when the Defense Department is in dire need of fresh strategic thinking, service chiefs labor under growing pressure to find ways of repackaging today’s forces to extract both greater strategic utility and monetary savings, all the while clinging to yesterday’s “requirements” to justify excess force structure.

The defense industry needs a hedge strategy to sustain profitability in a declining market, a strategy that will help companies navigate the “no man’s land” between the old and the new reality.

In the near-term, the principal challenge for the defense industry is how to move forward without alienating the customer. While industry has the incentive to promote modernization and recapitalization, the customer remains focused on protecting the military’s organizational and bureaucratic status quo.

Against this reality, industry should work with its customer toward a “shared discovery” of new business models and priorities. What was previously perceived as valuable and effective would be exposed as unsuited to the current and future environments. The trick is to offer capabilities that allow senior leaders to move in a positive direction, not because their old ways were wrong, but because new options offer better solutions for the evolving security challenges of the future.

The impact of constrained budgets is a major concern for military leaders. The Joint Staff recognized that reality in the latest version of the Joint Operational Access Concept, released in January 2012. The document emphasizes “cross-domain synergy,” or an integrative, rather than an additive employment of capabilities from different domains. In other words, the answer is a future “joint” framework that integrates functional military capabilities — maneuver; strike; intelligence, surveillance, reconnaissance (ISR); and sustainment — across service lines.

ISR and strike capabilities — kinetic and non-kinetic — began to decisively influence not only tactical maneuver on land, but also the operational and strategic conduct of operations in all domains in 1991. They gave rise to dispersed, mobile warfare — an environment that creates the demand for high-lethality, low-density forces. On land, at sea, in the air and in cyberspace, America’s future armed forces must marshal and apply combat power disproportionate to their numbers. This means organizing and equipping differently, as well as integrating ISR, strike, maneuver and sustainment capabilities across service lines to make the return on capital invested the customer’s top metric.

A strategy to help the military transition successfully to future missions demands that industry team with the customer. It’s not easy, but it is vital if the two are to share in discovery through rapid prototyping of new capabilities that maximize operational capability at cost.

Defining ways for industry and government to partner is a key component of the strategy. There are examples from public-private partnerships in the United States, Japan and Germany that industry leaders can draw on for inspiration. These models are preferable to fixed-price development contracts that place all of the risk on industry.

Another component of the strategy involves getting military equipment and technology into production sooner in order to maximize manufacturing efficiency, and therefore, profit margins. The previous model of extending development contracts at fixed fees is not sustainable. New technology always comes with a price in cost, schedule and complexity, and there are no easy fixes.

Teaming with the customer to efficiently field new capabilities can both reduce the cost of total ownership and manpower and free up resources for further recapitalization. This approach calls for rapid prototyping or reliance on thorough testing and experimentation with smaller inventories of new equipment before billions of dollars are committed to larger program investments in new, untried and uncertain technologies.

Rapid prototyping — design-build-iterate before full-rate production — requires an agile customer in the armed services. When the defense establishment was awash in money, the desired agility was not possible, but now, in a period of constrained budgets, the armed services can get more value, faster, from 10, $100 million contracts that invite innovation and entrepreneurialism than from one, $1 billion contract under the current model of “winner takes all.”

Reliance on rapid prototyping is not popular inside the military services or their supporting industrial base. Smaller initial inventories mean smaller profits. But industry and the military it serves are increasingly compelled to operate within the laws of physics and unavoidable fiscal constraints. And when a solution is identified through this process that has a high capability-to-cost ratio, it will be procured in high production volumes.

The American taxpayer can neither afford nor does he need gold-plated systems in the form of the Future Combat Systems, Expeditionary Fighting Vehicle or other major programs that suffered from undisciplined requirements and optimistic acquisition strategies. What works now must triumph over “unobtainium,” the elusive technological silver bullet that never seems to arrive in time or on budget.

The good news is rapid prototyping provides the customer with the low-cost option of allowing soldiers, sailors, airmen and Marines to provide useful ideas for improvements and accelerate the resulting modifications. It’s good for industry and for the nation’s armed forces.

Stephen N. Burke is the chief executive officer and Doug Macgregor is the executive vice president of Burke-Macgregor Group LLC in Reston, Va.:

Topics: Defense Department, DOD Budget, Procurement, Acquisition Reform, Defense Department

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