Opinion: How To Assess Defense Prospects For The Future

Byron Callan

During upcoming earnings conference calls, expect some defense contractors to again state that they are well-positioned in high-priority programs and markets that fully align with customer priorities. In addition, planners and analysts are going to be asking a lot more questions about contractor positioning and the outcome of the 2020 U.S. election. Who will be best positioned if President Donald Trump is reelected or if there is a Democrat in the White House in 2021?

On the first assertion of “well-positioned,” to a degree it is axiomatic. Defense requirements are validated, so by that very process, they take priority over emerging and yet-to-be-funded requirements. However, if one accepts the premises that Defense Department budgets may be flat for a multi-year period and that demand signals for security are going to rise, the sector will be entering a far more dynamic period in the 2020s than the past 4-5 years. Instead of being “well-positioned,” a broader set of filters may need to be applied. Posture may be a better way to assess contractor outlooks. There are five attributes on which this may be assessed.

1. The priority and relative safety of programs matters both in U.S. and international markets. But that needs to be assessed and reassessed against changed defense needs. Today's major programs of record are likely to change. If there is doubt on that issue, a reading of the U.S. Marine Corps Commandant's Planning Guidance released last July may dispel notions that the next 10 years are going to be stable and predictable.

2. One contractor can disrupt others through new product and service offerings or even a new business model. Examples of the former include Boeing's T-X/T-7 aircraft, which, if evolved into a fighter/attack aircraft, may be good enough for some missions. Kratos' Valkyrie is another example, which could affect demand for manned combat aircraft. On the latter, the Pentagon now intends to purchase launch services instead of expendable launch vehicles. Where else might these sorts of “as a service” models be applied?

3. The pipeline of bid opportunities: There are some large programs that are in competition and for which decisions are pending. The Ground-Based Strategic Deterrent, Long-Range Standoff, Army aviation and ground-vehicle modernization and Navy FFG(X) programs are some of the larger ones that could be decided, but there also are classified ones and swaths of opportunity in unmanned systems, hypersonics, software for data and artificial intelligence, and cybersecurity. International opportunity also clearly matters in assessing how a contractor is postured.

4. The ability to execute within cost and schedule is essential. Human capital, technology application and risk, contracting and supply chain management are critical attributes. This also will tie into the bid pipeline and the degree to which a contractor is postured to pursue new opportunities or if the contractor will have challenges managing its current portfolio of products and services. From the outside looking in at contractors, this attribute may be difficult to measure. Open job position data can be sketchy, but it is one metric to consider. Performance on current programs is another.

5. Contractor culture will be critical in the 2020s. One aspect of culture is how well a contractor anticipates potential changes in defense and security needs. Another is how receptive company leaders are to positioning or repositioning to capitalize on those changes. There will not be solid metrics here, although there are plenty of good questions to ask.

In order to anticipate change, contractors are going to have to be wired to understand when and where change is occurring. This has to allow perspectives that may differ from the consensus view to reach leaders so they can assess whether ideas are worth pursuing or if there is a threat to be addressed. Part of this posture entails a willingness to create top cover and breathing space for conflicting views.

There will be a natural tendency of company leaders to continue to exploit current business models and protect major products and services. There will likely be very strong pressure from shareholders to sustain or increase operational margins and cash flow and stay within current business lanes. Posture, however, may also include a willingness to take some short-term or even intermediate-term pain and risk in order to better position for the future.

Innovation is an overused term these days, and it may be like former Supreme Court Justice Potter Stewart's assertion on obscenity: “I know it when I see it.” Be that as it may, contractors must dedicate time to innovation every week in order to achieve it.

https://aviationweek.com/defense/opinion-how-assess-defense-prospects-future