VIEWPOINT DEFENSE CONTRACTING
Driving a New Business Model in Defense Electronics
The U.S. defense industrial base is undergoing a major transformation. Domestic political and budget uncertainty, geopolitical instability and evolving global threats have all become constants. Defense spending now stands at the lowest percentage of national GDP in modern history, and is in danger of being crowded out by other pressing domestic needs including social programs and the servicing of a growing national debt.
In an effort to address this effectively and within budget, the Defense Department is continually examining and issuing new and updated directives, such as its Better Buying Power initiative. This mandate, first launched in 2010 and updated most recently as BPP 3.0, is the department’s effort to increase productivity, efficiency and effectiveness of defense acquisition efforts. BBP encompasses a set of fundamental acquisition principles to achieve greater efficiencies through affordability, cost control, elimination of unproductive processes and bureaucracy, and promotion of competition.
Mercury Systems supports the principles of BBP 3.0. Addressing firm-fixed pricing, a redefinition of “commercial items” and procurement practices that encourage open architectures will help make BBP 3.0 a reality.
Firm-fixed pricing contracts shift cost and pricing risk to sellers, driving them to innovate and optimize to remain both competitive and profitable, while encouraging the defense industrial base to build technology solutions that are standardized, modular, based on open systems architectures and that leverage reusable technology elements. This has become a pressing issue as the department — and companies supporting the platforms and missions that are of national and global importance — need to engage in business practices that can make the model a success.
In the context of procurement and pricing, a commercial item should be defined in terms of which party bore the risk and cost of developing and marketing the technology. Current defense procurement regulations determine commerciality based on answers to questions such as: Who else bought it? What did they pay? What was it derived from? How close is it to what’s in a catalog?
These inquiries are not relevant to effective technology investment decisions or cost-effective procurement. Instead, officials should be asking: Who supplied the investment in R&D? Has the technology provider invested in open systems and modularity and standardization? How can these technologies be applied across multiple applications, programs and missions? And most importantly, has there been competition to provide a cost-effective solution?
Until this reassessment of commerciality is completed, the incentives for industry to shoulder more of the cost of research and development will be weak, and the BBP 3.0 initiative is unlikely to gain the kind of traction it deserves.
Directives aimed at driving open systems architectures, in place for over 20 years, have actually discouraged investment in true open systems, which are vital to supporting rapid technology development and insertion and affordable upgrades of existing platforms. This is in part because the department views open systems architectures as a mechanism to drive down costs, not as a means of driving rapid innovation, shared standards and the development of pre-integrated technology solutions.
The department should change this perspective and treat the development and use of modular, open systems architectures as a requirement rather than as an end in itself or a competitive differentiator. As a result, competitors striving to differentiate themselves through innovative implementations, applications and user interfaces will deliver better, more affordable systems. There will be faster adoption of open standards-based technologies, more successful platform development and ultimately higher mission success rates — all while driving down costs.
To successfully address these pressing issues and to meet the challenges and mandates in BBP 3.0, Mercury Systems has developed a four-part, next-generation business model that is aligned to the Pentagon’s acquisition goals and objectives.
First, take commercial technology and quickly adapt it for highly specified uses in defense applications. This is not an easy task, and one on which most commercial companies don’t focus. Drive rapid technology development cycles in a way that traditional defense companies aren’t accustomed to because they don’t play in short-cycle worlds. The department has different specifications, requirements, operating environments and different mission sets than what most commercial companies are accustomed to. It must be done all while meeting affordability requirements, and almost exclusively on a firm-fixed price basis.
Second, invest between 15 to 20 percent of annual revenue on internal research and development, which drives value-based innovation. When it comes time to devoting R&D dollars to a solution, the company is already planning how to leverage its work across multiple opportunities, customers and programs. Thus, it reuses a particular solution multiple times, thereby realizing the value of its initial investment many times over.
Third, drive toward pre-integrated solutions that make up modular technology building blocks, where the subsystem has a high technology readiness level. Use an array of open application program interfaces to enable customers to easily add their applications and algorithms to solutions. This results in lower integration costs, quicker time-to-market and a draw-down of risk for the platform and program.
Finally, use modular open systems architectures to speed up the rate of innovation and adoption as specified in BBP 3.0. Couple the open architecture capability with a modular building block approach that helps drive costs down and reduces time to market. The result is innovative pre-integrated solutions that incorporate the latest technology developments from the commercial world. That helps drive affordability and innovative platform and program modernization.
In summary, improving innovation — a key focus of BBP 3.0 — is at the heart of the business model and should be a core tenet of all industry participants. It is hoped that the reforms outlined in BBP 3.0 will gain traction so that the nation retains its technical dominance in defense systems.
Mark Aslett is president and chief executive officer of Mercury Systems Inc. and Gerald M. Haines II is its executive vice president and chief financial officer.