A Few Trends to Watch
Tension was in the air at last week’s AUSA meeting. Hanging over the entire conference was an impending sense of doom. Companies wondered where their next sale would come from; program managers worried about meeting their sales goals; and the military just focused on getting in and out without contractors bleeding them dry. It was quite a scene.
But even with the overwhelming pessimism on the floor, there were some bright spots. Smart defense companies — and there are many — were finding a way around the budget blues. And here are a few examples of how.
Selling the package
As I’ve said before, selling individual widgets to the services will become more difficult as funding becomes scarce. It seems that a lot of companies have begun to realize this. As one program manager put it: “Some contractors are selling the shirts, some the ties and others the belt. We’re offering the whole suit, from shoes to cufflinks.”
By offering a program office the whole package, what companies are doing is essentially reducing the program risk to the service by absorbing it in their proposal — and risk is everything in this environment. Program managers have less money than ever and are being required to do more with it. Playing the role of lead integrator on their programs is function that they can and will delegate.
Industry has also realized that by working together, rather than against each other, the chances of getting their programs off the ground are much higher.
This is true for a number of reasons. The primary reason is that by coming together, industry is making an implicit statement that this program is more important than profit, that they’re willing to put aside partisanship and make it work. Another, more practical reason for industry “dream teams” becoming more popular is that from a purely statistical stand-point, an 80% Pwin on $100 million is much more palatable to shareholders than a 30% shot at $300 million.
Industry teams also provide more political cover. Instead of having a single state’s delegation to do your bidding, now you have three or four. This means that rather than a lone Congressman pushing your program, they’ll have allies. It’s hard to overstate the importance of this.
Finally, as many companies are finding out all too often, protests are becoming more likely as dollars become harder fought. By having all the players on one side, the chances of a protest become negligible, allowing the program to proceed on schedule.
Expect programs like the Joint Air Ground Missile (JAGM) to go in this direction. Rumors are already swirling that OSD is pressuring Raytheon and Lockheed Martin to get together on this one.
According to a Jane’s Defence Senior Analyst, the Army is about to experience a “perfect storm” in vehicle acquisition, with most if not all of its wheeled platforms needing replacement or significant investment in the coming years. Industry’s response? More JLTVs, GCVs and Strykers. To be completely fair, some companies are responding to the Modernized Expanded Capacity Vehicle (MECV) program, but even this represents a technological evolution rather than a revolution.
As new program starts become fewer and more competitive, many companies will look to extending the life of their legacy programs by convincing military brass of their value, in contrast to new procurements. This approach has already seen considerable success. The example that springs to mind is JTRS, which is being bled out slowly in favor of less expensive (but also arguably less effective) upgrades to legacy radio systems.
Whether these effects will be long-term or simply a reaction to the current climate is somewhat unclear at this point. But what is apparent is that the Army is not the only service that can expect Industry to react this way. All across the services, we’re already seeing many of the same practices; and as budget cuts begin taking their toll, these same strategies will begin to make more sense to more companies.