Economies Of Scale Ain’t What They Used To Be.

Last month, while the world’s elites were gathering in Davos, Switzerland for Klaus Schwab’s World Economic Forum (WEF), I was in Washington hosting an address by the acquisition executive of the U.S. Special Operations Command, James “Hondo” Geurts. While the setting for these two occasions could not have been more different—our beverages were self-served in paper cups, it shall suffice to say—their central messages bore a striking consonance. Both underscored that talented, focused people are the keys to progress and effectiveness in an age of increasingly complex challenges. However, listening to Geurts and thinking about the particular significance of this people-first maxim for aerospace and defense brought into focus what I regard as an important corollary to the rule: economies of scale just ain’t what they used to be. Small is the new black.

Previewing the theme of WEF-2016 in last month’s Foreign Affairs, Klaus, its Executive Chairman, explains the industrial revolution that lies before us like this:

The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.

The advent of this brave new world, writes Schwab, holds both promise and peril for business, government, and society. For business, “the emergence of global platforms and other new business models… means that talent, culture, and organizational forms will have to be rethought… [I]n the future, talent, more than capital, will represent the critical factor of production.”

Beyond that premise, however, Schwab’s article sheds little light on the question Geurts’s address got me to thinking about: exactly how will these social and technological trends change organizations, and especially those comprising the structure of aerospace and defense?

To answer the question for myself, I reached back to some research my former colleagues and I at Charles River Associates had done in 2010 to help aerospace companies apprehend the state of “Innovation in Aerospace & Defense” at the inflection marking the tumultuous close of the century’s first decade. In it, we noted a progression of the organizational forms underlying the industry’s iconic achievements across the previous century. NASA’s Apollo program, arguably the crowning achievement of Schwab’s second revolution, exemplified the employment of large scale and concentrated resources to leverage that era’s technology base. A generation later, in the glory days of Schwab’s third revolution, there emerged from a small lab at Eglin Air Force Base the makings of what became the Joint Direct Attack Munition, which leveraged distributed technologies (GPS, geospatial mapping) into what is arguably the most iconic weapon of the military’s late-20th century precision revolution.

Following this progression forward, we, like Schwab, envisioned a diffused and diversified technology base and corresponding organizations that leverage advanced sensing, big data, and information networks in still more atomized forms.

All of which brings me back to Hondo Geurts. Like Schwab, Geurts is an apostle of the people-first maxim. Speaking from the podium of the Atlantic Council, he convincingly argued that SOCOM’s renown at rapidly putting advanced technologies in the hands of elite warriors owes to its people and a culture of trust and accountability, not to any special dispensations from the acquisition regulations. “We can talk process all day,” said Geurts. “I’m not a process guy, I’m an outputs guy, and the way to get outputs is to focus on intent, people, and culture.”

At the same time, I couldn’t help thinking that Geurts’s focus on outputs is in part a luxury afforded by the size of his enterprise. Although it’s not exactly “small,” by any measure­­—Geurts plans and executes a roughly $6 billion budget for technology, acquisition, and logistics which he described as involving about 400 programs and projects, 100 to 200 combat evaluations, and 100 S&T efforts—SOF AT&L is nonetheless an organization of only about 600 people, roughly the size of my high school or the Army battalion in which I served, organizations that thrived in part because it was possible for everyone to know everyone.

Geurts himself admits to the importance his organization’s relatively small scale plays in its effectiveness. Comparing his own challenges to those of counterparts in the military departments, for instance, Geurts acknowledges, “I have an inherent advantage: I own S&T. I own the acquisition. I own the contract. And I own the procurement and the sustainment.” In addition, Geurts credits the quick tempo of SOF AT&L to the team-sport mentality that prevails when SOCOM’s operators, budgeteers, and program managers are able to meet face-to-face when problems need fixing.

Scaling up is a reflex our industry and military need to rethink if not altogether unlearn. Scale efficiencies counted for a lot in the Industrial Age when electric power, mass production, and moonshots were creating big economic and social value. By its ability to create the illusion of control and coordination with information and telecommunications tools, the Information Age perpetuated Industrial Age expectations about how large scale would help solve complex problems and reduce costs.

But scale efficiencies were never infinite even then, and the bend in that curve arrives sooner still in an age where talented labor rather than capital investment is what enables competitive advantage. Talented people will not work in organizations that rely on inches-thick policy manuals to instill values and culture, or where big investments in the tools necessary to coordinate vast scale (enterprise resource planning software, travel budgets, etc.) appear to trade off against pay/benefits and authority/accountability.

Asked about his hopes for the DoD’s Third Offset, Hondo surprisingly said nothing about the fantastic future of technology. Instead, he said that the way SOCOM will offset its adversaries’ comparative advantages is with speed. “Velocity is my combat advantage,” said Geurts. “Iteration speed is what I’m after. If I can go five times faster than you, I can fail four times and still beat you to the target, and I know I’m going to have a better product when I get there.” Now there’s a manifesto of competitive advantage in the fourth industrial revolution, one to which large scale is nearly antithetical.

Small. It’s the new black.

Steve Grundman is the M.A. and George Lund Fellow at the Brent Scowcroft Center on International Security. This essay is adapted from an editorial in today’s issue of Aviation Week & Space Technology.