Is My Ship Sinking?

“This too will pass”.   I’ve heard this phrase uttered often and recently by aerospace and defense (A&D) leaders.  Decisions and actions (or inaction) echo the same sentiment.  Months ago, the concern over sequestration was muted and nearly imperceptible.  Now, with just two weeks left, it appears that some may be taking the whole thing seriously.  Yet sequestration is just one factor A&D executives should be concerned with.  The more significant issue is the fundamental shift underway in the entire market.  Have you missed it?  Is your company prepared for rough seas?  Will you survive or sink?  Is your company on a path to slowly rust away before disappearing?

It’s understandable that seasoned A&D professionals look at the current defense budget with a jaundiced glance.  Having survived previous downsizing periods, they reason that the tide will once again turn.  For a substantial number of mid-upper tier management, the last major contraction followed the fall of the Berlin wall.  At that time, the expected “peace dividend” motivated a period of industry consolidation.  Those that survived felt vindicated when defense spending turned around after 9/11.  Many believe that a new conflict or some other security crisis will reverse the downward trend just like it had previously. 

The downward trend in defense will continue and reach a new, lower ‘norm’.

Why do I believe this contraction is different than others?  What should A&D leaders do if in fact, this turns out to be the case?  Not since World War II, has the Nation’s debt been such a significant concern.  Coupled with a deep recession and prolonged recovery, the Country cannot outrun its debt with growth or taxes.  The economic conditions are exacerbated by a global economy that remains in a funk.  What this means for A&D companies is that the ‘safe harbor’ of international sales used to cushion reduced US budgets won’t materialize.  While these two factors alone could be overcome with time, another factor signals a change in the underlying structure of the A&D industry itself.

That structural change consists of a complex array of issues that will forever transform the way the Defense Department buys.  The signs have been evident for years and sadly companies chose to consider them anomalies instead of sea-state changes.  For example, R&D spending used to be a given in most development efforts.  The Government now has placed more pressure on companies to make their own investments and bring working product to the market instead of relying on RDT&E. The push for more fixed price contracting, the emergence of lowest price, technically acceptable (LPTA) practices, and a myriad of other shifts have all signaled that Government intends on being a much more disciplined and assertive buyer.  Troubled programs were often terminated and later resurrected with a new name.  Can you name a program that has been restarted lately?

Another shift has been the extended time from RFP to award.  What was once a reasonably predictable timetable has now become unreliable.  Acquisitions within the US are beginning to look more like international sales with cycle times measured in years not months.  Then there are the protracted budget battles that have driven yearly continuing resolutions (CR).  Each year Congress and the Executive branch fail to meet their budgetary obligations on time.  The increased use of CR delays contract awards and impinges on release of funds for ongoing work.  The pattern of annual threats over Government shutdowns is also having a significant effect. 

Large companies often floated the Government during these times by continuing work without timely payment.  Those days however may be rapidly disappearing.  Shareholders will be more reluctant to “loan” money to the Government when there is so much uncertainty.  Smaller companies who have always had a challenge staying in operation during these disruptions will find no safe harbor.  So if there is a Government shutdown or protracted CR, will defense production continue or will companies refuse to work?

There are far fewer systems where Government investment is warranted.  Increased reliance on cyber and other forms of warfare make the traditional RDT&E process increasingly irrelevant.  The new ‘norm’ capitalizes on the pace and advances of commercial technologies that enable them to field new capability without substantial modifications.  When service members utilize their own mobile technology in the field adapting and creating solutions on-the-fly, it raises questions as to the true value of an elaborate acquisition system.  A recent WSJ article highlighted how the F-35 software process is ill-equipped to meet the rapid pace of change.  It used to be that A&D led the technology charge, now they are trying to catch a speeding bullet train that left the station years ago.

A&D leaders have important decisions they should be preparing for or have already made.  First, can the company remain profitable and viable as an A&D enterprise?  If so, in what ways will the company be able to grow in spite of a prolonged contraction in defense spending?  If not, what markets or opportunities have the highest probability of supporting a successful transition?  What products, technologies, and skills are transferable to these new markets?  Which ones should be eliminated?  And these are just the start.  Instead of relishing the success of the past, responsible leaders should be gazing into the future and preparing for the emergence of an entirely new industry.  And the visionaries in that bunch will actually be out front creating it.

Duane Grove is founder of Connect2Action, a strategy execution specialist at the intersection of employee engagement and executive leadership, igniting innovation as a lever to accelerate your growth.  Follow Duane on Twitter @connect2action and connect with him on LinkedIn, Facebook, and Google+.  Learn more by visiting www.connect2action.com.