January 13, 2015

Last week, Paul McLeary of Defense News aired the views of some seasoned observers of our business regarding the future of strategy and structure. Our industry, as the title went, is "Running out of Time; Mergers Loom." Many of the larger contractors have been focusing on cutting costs, as they had grown organizationally soft and operationally lazy under the largesse of the Bush Administration. So, they're now using the liberated cash to buy back shares and pay dividends with abandon. After all, they lack clarity into the strategy of their biggest set of customers, the US Defense Department, so what else can they do? In another year or so, as the argument continues, the opportunities for further cost-cutting will have run their course, so options for restructuring will then need to be found outside the four walls. That next merger wave will then descend. It's actually a familiar argument that widely attracts positive head-nods. But I have two problems with it.

First, just merging rudderless companies into bigger companies isn't actually a strategy. It's just a page from the playbook of the 1990s, when quickly and consistently decreasing spending called for at least some degree of industrial consolidation. Spending is mostly flat now, and a balance of domestic political forces and a certain level of external threat will likely keep it that way for some time.

Second, and more poignantly, why no clarity? Because frankly, the customers' needs aren't so hard to discern.

Take just the example of the US Navy. Today at the Surface Navy Association meeting in Crystal City, Vice Admiral Tom Rowden, the Navy's commander of all surface naval forces, is explaining what he wants next: distributed lethality for a reinvigorated surface fleet. Who else could give clearer signal of demand? As I wrote the other day, three companies are trying to fill that very need right now: Lockheed Martin, with its Long Range Anti-Ship Missile (LRASM); Boeing, with its Block II+ Harpoon missile; and Kongsberg, with its Naval Strike Missile (NSM). The latter two are sufficiently confident of the ongoing need that they are funding the work themselves.

Or look at what Raytheon did in winning the Navy's Air & Missile Defense Radar (AMDR) program. Picking Lockheed's lock on the Aegis business was a fifteen-year investment, but no one doubted that the US Navy would continue to care about air defense, and that the Navy would eventually move onto a technical architecture other than that of the SPY-1 radar.

The work is hard, but the imperative is clear. Following David Ochmanek's "Advice for Defense Innovators" in yesterday's Defense News, contractors can profitably focus "on trying to solve discrete, enduring, operational problems." As we heard it put at the Council last week, figure out what the Navy—or any military customer—is going to need for the next 20 to 30 years, that it doesn't quite have now, and figure out how to make a lot of them. Isn't that how business is supposed to work?

James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.

RELATED CONTENT